US economy’s strength hinges on how much the rich spend

By Jonnelle Marte and Catarina Saraiva | Bloomberg

Just how K-shaped is the US consumer?

The idea that spending by rich Americans is driving an ever greater share of economic growth, while people on the low end pull back, has become a staple of economic research and corporate planning. Some analysts push back — arguing that the trend has been exaggerated, or even made up completely.

It’s hugely important who’s right. US consumers spend some $21 trillion a year, and figuring out where that comes from helps gauge the economy’s durability in the face of shocks, especially when high energy prices due to the US war on Iran threaten to hit poorer households hardest. An expansion relying on the shopping habits of a small, wealthy cohort is more vulnerable than one backed by broad-based spending. Businesses also need to know the trends so they can decide what goods and services to invest in.

In one camp are economists like Mark Zandi from Moody’s Analytics, who estimates the richest 10% of households account for nearly half of consumption, up from one-third three decades ago. “There’s no debating that the income, wealth and spending distribution is skewed and getting more skewed,” he says.

On the other side are skeptics who say that even if income and wealth disparities are widening, there’s less evidence of a matching shift in household spending. “What K-shape?” Barclays economists including Mark Cus Babic wrote last month. “Consumption inequality is elevated, but not unusual.”

It’s a tangled and often wonkish debate that rages across various timeframes – some analysts want to establish the pattern over decades, others to know what’s going on right now – and invokes patchy data that often arrive with a lag.

Here’s a look at what the numbers show and don’t show, and the arguments on either side of the question: Is there a K-shape in the spending distribution?

Yes, because: Stocks are K-shaped too…

Booming asset markets, and especially stocks, have sent wealth cascading upward to the richest households. Zandi and others say those gains have encouraged well-off consumers to splurge, keeping the economy afloat as low-income Americans squeezed by inflation fall behind on their bills.

The S&P 500 has more than doubled in value since the end of 2019, and the richest sliver of Americans own the bulk of it. Pretty much all economists say there’s a so-called “wealth effect” that leads the beneficiaries of such a windfall to spend more.

“When wealth rises like that,” says Thomas Ferguson — an economist at the Institute for New Economic Thinking — “those folks get really, really, really rich and so they can spend more.” Ferguson and co-author Servaas Storm estimate that gains accruing to the top 10% of households from 2020 to 2023 were large enough to explain the rise in total consumer spending above its longer-term trend.

…It shows up in real-time data…

To get a handle on immediate consumer trends, economists and investors often look at metrics based on transactions, via credit cards or bank accounts. Those suggest high-income households have seen faster spending growth in recent years when compared to other income groups — and the gap is widening.

That’s what the Bank of America Institute found, based on the lender’s internal data. High earners are getting bigger pay hikes since the start of last year and their consumption is rising faster too. “There is a K-shape in what people are earning and there is a K-shape in what people are spending,” says David Tinsley, senior economist at the Bank of America Institute.

Analysts at the Federal Reserve Bank of New York found that since 2023, inflation-adjusted spending grew most for higher-income consumers – while it was flat for the middle group, and declined for the lowest. Their work is based on receipts analyzed by Numerator, a market research firm.

…And companies are acting on it

Whatever the data may show, plenty of US businesses have identified a shift — and taken action.

For retailers, that might mean rethinking the map of their expansion plans, or revamping what’s on their shelves. Dollar Tree Inc., which estimates that about 60% of its customers last quarter earned at least $100,000, is expanding into wealthier neighborhoods. Walmart Inc., long known for its low prices, has renovated stores and introduced more high-end products to draw in higher earners.

At airlines, there’s a race to revamp cabins so they have more premium seats, and offer other perks to the higher-end fliers who are driving revenue. Delta Air Lines Inc. reported double-digit growth in business travel at the start of this year. “We’re at the top end of that K, in terms of who our consumer is,” Chief Executive Ed Bastian told Bloomberg TV.

But everyone’s better off now…

Take the slightly longer view, some economists say, and things look more balanced. Coming out of the pandemic, low-paid workers scored the biggest pay hikes amid booming demand in places like restaurants – narrowing income inequality. Stimulus checks also helped many to pay down debt or boost savings.

All of this left most households in a more stable financial position and delivered benefits that have lasted, according to Matthew Klein, author of the Overshoot newsletter. “Everyone is better off,” he says. “I think that’s partly why we’ve had such a sustained expansion.”

What’s more, house prices have also climbed substantially since the pandemic – and compared with stocks, those gains were spread more evenly. The hot housing market buoyed many middle-class families whose wealth is concentrated in their homes.

…There’s no big shift in official spending data…

One of the key arguments for the no-camp – advanced by economists like Antoine Levy at the University of California, Berkeley — is that the K-shape simply doesn’t show up in the only US government report to explicitly address the topic.

Every year, the Bureau of Labor Statistics produces a Consumer Expenditure Survey, which breaks down households into income groups and shows what they buy. The downside is that it comes with a lag. Still, the latest data for 2024 showed the top 20% of households accounting for some 40% of spending – roughly the same as they were in 2011. The share for the bottom 20% also held steady around 9%.

Other studies conclude that the rich-household share of spending has crept up over time, but don’t see a dramatic surge. A Dallas Fed analysis found the top 20% of earners accounted for 57% of consumption in the post-Covid years — up from 53% in the 1990s, but not a big enough shift to make the economy more fragile.

…And growth isn’t just in stuff rich people buy

If spending was increasingly skewed, you’d expect the fastest growth to be coming in the categories where rich households are the biggest buyers. That’s not what the numbers show, according to one argument that economists make against the K-shaped trend.

Samuel Tombs and Oliver Allen at Pantheon Macroeconomics found that above-trend spending growth last year often came in areas like clothing and health care where low-income Americans account for a relatively large share of the total. In cars, by contrast – where the top 20% do about two-thirds of the spending – growth was sub-par.

It’s true that there’s been a divergence when it comes to sentiment about the economy, with lower earners increasingly pessimistic – but that hasn’t translated into actual spending behavior, according to the Pantheon team. “We see insufficient evidence to assert that consumption looks K-shaped,” they conclude. “The conventional wisdom is not always right.”