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Despite rosy top-line macroeconomic data, the divergence between higher- and lower-income households has come to the fore in the K-shaped economy, writes 451 Research analyst Michael Nocerino. Wealthier households, compared to those in the lower-income category, remain largely insulated from the impact of higher costs of living.
However, as challenges such as inflation and tariffs become commonplace, consumers adapt to rising prices and start to expect them. As a result, the current economic conditions no longer surprise consumers but align with what they anticipate.
Widening gap
Overall spending over the next 90 days is largely unchanged compared with 2024, with both the number of respondents planning to spend more and those planning to spend less declining slightly compared to Q4 2024.
However, higher-income households (those earning more than $100,000 per year) have the most positive (bet +13) outlook towards spending, according to a survey conducted by 451 Research from S&P Global Energy Horizons. Lower-income households (those earning less than $50,000) per year report a -11 outlook for spending, while they are also more inclined to stay home compared to the higher-income households (38% versus 55%).
Likewise, the top earners are more likely to save more money (49% versus 30%). A larger percentage of lower-income households are experiencing reduced income (26% versus 18%) and they tend to use their income to pay down credit cards (41% versus 30%).
Belt tightening
Nevertheless, higher- and lower-income households are allocating similar portions of their household budgets towards non-discretionary spending in the next 90 days. Restaurant and travel, the two bellwethers of consumer economic health, underscore the bifurcation as higher-income households plan to increase spending in these areas.
This contrasts with the predicament faced by the lower-income households as almost half (49%) of them say it is very or somewhat difficult to keep up with monthly expenses, in comparison to only 18% of higher-income households.
Recession fears
Up until now, the economy has been bolstered by the spending of higher-income households, though apprehensions about a potential recession persist. Should these affluent consumers cut back on their spending, it could undermine the consumer economy and lead to broader negative repercussions throughout the economy.
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