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You’ve heard about the K-shaped economy — the idea that affluent households’ financial fortunes are on an upward trajectory, while the middle class and lower-income consumers are trending down — what does it mean in practical terms?
The up and down slopes of the K are a useful proxy for the divergence of different types of consumers. But let’s look at what it means for the economy. The gap in spending power has been growing: The highest-earning 20% of households accounted for half of all consumer spending in 1995. Now it’s about 60% of all spending.
The top 10% drive half of all purchasing across the economy. This bodes well for sellers of luxury goods and services: Jewelry, high-end cars, high fashion, exotic travel, home renovations, fine dining, etc.
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Less-affluent shoppers are feeling strained. And are spending accordingly. As a result, the discounters stand to win more business as lower-income folks seek to stretch their dollars. This goes for the middle class and modestly well-off, too…there is a noticeable trend of those consumers shopping more at large discount chains, even if they technically don’t have to. For instance, buying groceries at Walmart or Aldi instead of Kroger or Safeway.
Retailers who cater to the middle of the income spectrum will struggle as their traditional customer base feels pressure to shop down-market, while the rich continue to patronize businesses that cater to the well-off. The recent sales struggles at Whirlpool, which says its basic appliances are selling well, but not its fancier ones, are a harbinger of this trend, middle-income folks prioritizing essentials over splurges.
This divergence explains why consumers are downbeat but still spending: Net spending, driven by the affluent, is up. But overall sentiment is down because the affluent make up only a small share of the people in economic surveys.
This is one reason financial markets have been able to perform so well, even when most consumers aren’t feeling good about their finances. Business is OK in general, and there’s little sense of the euphoria that can carry bull markets too far.
Note the obvious downside of wealthy consumers driving the economy: The vulnerability to a pullback, especially whenever the stock market drops. More and more, GDP growth depends on a small subset of well-off folks who feel great about their financial situations, as long as stocks are rising, home values hold up, etc. When the next market downturn hits, those same consumers may feel differently.
Meanwhile, the less wealthy are already getting tapped out, as shown by the decline in the national savings rate, now under 4%, vs. a historical norm of 5.5%. Few people are building much of a safety net to cushion the blow when the next bear market hits.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
