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E-mail Xinhua, February 6, 2025
by Xinhua writer Yanan Liu
NEW YORK, Feb. 5 (Xinhua) -- The yawning income inequality has contributed to divergence in U.S. consumer spending and sentiment, according to U.S. economists.
There has been very large bifurcation between low and high income households over the last couple of years, said Sarah Wolfe, senior economist and strategist with the Morgan Stanley Wealth Management.
"The reason, however, that the aggregate consumer spending data has held up is because the top 20 percent of the income distribution accounts for nearly half of consumer spending in the country," said Wolfe at a recent panel discussion during NRF 2025: Retail's Big Show, a yearly expo organized by the U.S. National Retail Federation (NRF).
While the average household is much more insulated to higher interest rates in this rate hiking cycle, renters in the lower middle income cohort have felt a tremendous amount of pressure, according to Wolfe.
"If you have high income households that are doing well and feeling good, if they're spending, it's gonna kind of mask the pressure at the lower end of the income distribution," Wolfe warned.
Wolfe noted that there was a tremendous wealth effect since the beginning of the COVID-19 pandemic and 5 trillion U.S. dollars in wealth gains last quarter alone that disproportionately benefits higher income households.
Though fundamentals of consumer spending are really healthy, there are some pockets of stress, said Gregory Daco, chief economist with EY-Parthenon, the global strategy consulting arm of Ernst & Young LLP.
Delinquencies for credit cards and auto loans started to rise and less income growth families, especially families at the lower end of the income spectrum, are perhaps going to feel more of that constraint in terms of credit conditions, said Daco at the panel discussion.
Families at the higher end of the income spectrum are still doing relatively well and they are doing more than their fair share of consumer spending, Daco added. Meanwhile, families at the lower end of the income spectrum are a little bit more constrained and have more difficulties with this high price environment.
"I think that's what's reflected in the breakdown of consumer sentiment measures" in terms of income, Daco said.
The disconnect between consumer attitude surveys and consumers' spending has been going on for a couple of years, echoed Jack Kleinhenz, chief economist with the NRF.
Lower income households did actually incredibly well at the start of the pandemic thanks to stimulus checks and unemployment insurance benefits, said Wolfe.
Lower income households' spending was surprisingly well in 2021 because a tremendous amount of excess savings were built, added Wolfe.
Still, excess savings with lower income households were exhausted after one year to one and a half years.
"While the middle and upper income households are actually still sitting on more savings than pre-COVID (era), the lower income houses are in the red," said Wolfe.
The bifurcation of U.S. consumer spending could get worse because new tariffs disproportionately affect lower income households and more of their consumer basket is goods over services, according to Wolfe.
"You could see more of that price effect hit lower income household" while deregulation, extension of tax cut and wealth effect mostly benefit the high income groups, Wolfe told Xinhua on the sidelines of the panel discussion.
"I do think there's a risk that while the bifurcation is starting to get better, these policies could cause it to widen again," said Wolfe referring to policies in the Donald Trump administration.
U.S. income inequality has been rising slightly since 1990 despite a temporary dip during the COVID-19 pandemic, said a comprehensive "State of the Nation" report released by the State of the Nation Project on Monday.
The United States compares poorly relative to the rest of the world and it ranks in the bottom 25 percent of countries, said the report.
"When we analyze income across all groups, we see that income inequality is rising. Combined with the reduction in poverty, this means that inequality is rising because income growth has been more concentrated among those who were well-off to start with," the report said.
The high and growing level of U.S. wealth inequality partially explains rising income inequality, added the report. Enditem
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