Major consumer divide: The rich keep spending, as poorer Americans struggle

• The dynamic is also capturing the attention of Federal Reserve officials, who see it as a risk to the overall economy.

The intrigue: At the Fed's last policy meeting, officials raised concerns that finances of low- and moderate-income households were strained — a "downside risk to the outlook for consumption," according to meeting minutes released Wednesday.

• Many Fed officials "pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans."
• In contrast, some Fed officials noted that wealthier households — responsible for a considerable share of aggregate spending — faced more favorable conditions, "with hefty wealth gains resulting from recent equity and house price increases."

The big picture: Delinquency rates started plummeting in 2020 and ultimately hit record lows, reflecting various pandemic-era stimulus measures supporting consumers that helped pay down debt.

• Now that has reversed, with delinquencies for auto and credit cards soaring past pre-pandemic rates.
• About 6.9% of credit card balances were seriously delinquent — at least 90 days past due — at the end of last quarter, according to the New York Fed. That's up sharply from 4.6% the same period a year ago.
• "An increasing number of borrowers missed credit card payments, revealing worsening financial distress among some households," Joelle Scally, a researcher at the New York Fed, said in a release last week.
• The New York Fed also found that new credit card delinquencies were "disproportionately ascribable" to maxed-out borrowers, the share of which are approaching pre-pandemic rates.

What they're saying: "I think one of the things that we are seeing is it's a little bifurcated," said Joseph Levin, chief executive of digital media company IAC, in a call with analysts last month.

• "The higher end consumers seem to still be doing quite well, and the lower income consumers, more feeling the pinch of inflation, are perhaps pulling back a little bit," Levin added.

What to watch: Sharp wage gains for lower- and middle-income workers once outpaced that of higher-income ones, but now those pay increases are more in line.

• And even though wages have risen, prices for key goods have risen faster — including for fast food, as our colleague Hans Nichols wrote Thursday.

Public opinion data also supports the idea that something flipped last year, leaving low-income households more negative on the economy than their higher-earning counterparts.

By the numbers: Starting in the spring of 2022, consumers with top-third incomes had roughly equivalent views on the economy as those with bottom-third incomes, according to the University of Michigan consumer sentiment survey.

• In fact, seven times within a 10-month period, the low-earners actually had a sunnier outlook than those in the high-income bracket.
• But that changed abruptly last year, with July 2023 looking like the break point. In the first three months of this year, the sentiment index averaged 17 points higher for high-income households than low-income households in the Michigan survey.

Flashback: In a way, the reversal makes perfect sense. Recall that in 2022, wealthy families bore the brunt of a declining stock market and a slump in home prices induced by tighter Fed policy.

• Wage growth among bottom-25% earners was 7.5% as recently as November 2022, according to the Atlanta Fed's tracker, easily outstripping the 4.8% wage gain among top earners.
• But over the last year, low earners have seen a comparatively modest 5.4% rise in nominal wages.
• And for those who own financial assets, things are looking up, with the S&P 500 up 48% since September 2022 and scraping new highs.

The bottom line: Financial challenges among working-class Americans are central to understanding both the politics and economics of 2024.