Why Rich Consumers Matter More

“Recovery gap” may be forming between wealthy Americans who feel better off and many others who don’t.

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Here's something odd: Consumer spending is drifting upward, raising hopes for an economic recovery. Yet the unemployment rate is spiking like a scary fever, with jobs more scarce than at any time since the 1930s.

Does this make sense? Where are unemployed consumers getting the money to buy new stuff? Are we so addicted to spending that we're forking over every last dime to get that doorbuster special?

[See 10 retailers gaining strength from the recession.]

Doubtful. The answers aren't sitting there in the usual statistics, but some educated guesswork might help explain who's spending and who isn't—while exposing a myth or two about the so-called recovery. The latest data shows that consumer spending rose 0.7 percent in October, while incomes rose just 0.2 percent. Since spending went up by more than income, that suggests consumers must be drawing down their savings to buy stuff.

But hold on—the saving rate fell by just a tiny fraction in the latest data, and in general it's been going up all year. So if people are spending more, it must be coming from somewhere other than a boost in income or a drawdown in savings. Household debt has been going down too, so consumers aren't financing new purchases by taking out loans or driving up their credit-card balances. The only other explanation would be a boost in people's assets that is providing an extra pool of cash for purchases.

Housing, the biggest asset for most families, is still falling in value in most areas. But look at that stock market! Up 23 percent for the year and 65 percent or so since it hit bottom in March. That has replaced lost wealth for some consumers and, presumably, made them more comfortable spending money.

[See how to tell if you're saving enough.]

Next question: Who tends to own stocks, mutual funds, and other investments that have benefited from the bull market? Many working-class and middle-income people are indirect stock-market investors, through their pensions or retirement funds (if they're lucky enough to have them). But that wouldn't boost spending today, since those investments are mostly set aside for future use.

The other big beneficiaries of the bull market are wealthy and upper-middle-income Americans with spare money to invest and plenty of savings set aside if they lose their jobs or have other problems. And the numbers suggest that affluent consumers are indeed the ones who feel like a recovery is at hand—a stock-market recovery, that is. They're probably the ones who are actually spending more. Maybe the only ones.

The usual economic data doesn't break down spending by income category. But wealthy consumers buy a disproportionate share of stuff, so it makes sense that any rise in spending could be attributed largely or entirely to them. The top 10 percent of earners account for 22 percent of all spending, for instance, according to Moody's Economy.com. The top 25 percent of all earners account for 45 percent of spending. The bottom 50 percent of earners, by contrast, spend just 29 percent of all the money in the consumer economy.

[See how the government is swallowing the economy.]

With twin crashes in the stock and housing markets in 2008, affluent consumers lost a lot more wealth than those with much smaller portfolios (or none at all). And the wealthy cut back like everybody else. But now, there's some evidence that wealthy consumers are bouncing back faster than the rest of America. Surveys by Gallup show that consumers in all income categories cut back by similar amounts over the last year. But in recent months, wealthy consumers say they're cutting back by less than lower-income consumers, compared with a year ago. "The question we're trying to answer," says Dennis Jacobe, chief economist at Gallup, "is whether the Wall Street rally has more of an effect on wealthy consumers."

It probably does. Gallup's data shows that job worries, for instance, account for 60 to 70 percent of the spending drop for middle- and lower-income Americans but just 30 percent of the drop among the affluent. So an awful job situation, with nearly 20 percent of Americans unemployed or underemployed, would spook the wealthy less than others.

A "recovery gap" between rich and poor carries uncomfortable overtones. Politicians in Washington court trouble when they promote policies that benefit the wealthy more than anybody else, especially in a recession. But it's actually in the nation's interest that well-heeled Americans start spending again, whether the rest of us join them or not. "High-income households are particularly important to the outlook because they account for a disproportionately large share of consumer spending," writes Scott Hoyt of Moody's Economy.com. "They have so much more money to spend that they are extremely important to aggregate spending." So swallow hard: Those record Wall Street bonuses you're about to hear about are actually a good thing. Even if they make you feel nauseated.

The wealthy aren't likely to share those bonuses or their stock gains, of course, so mainstream Americans need to wait for the ever elusive trickle-down benefits. And that highlights another economic anomaly: We may actually be in the midst of a two-tier recovery in which life is getting better for a small minority of Americans at the top of the income chain, and they spend enough additional money to drive up spending and other stats and make it look like there's a real recovery. But the same so-called recovery could bypass many ordinary Americans, which is what seems to be happening now.

At least one thing hasn't changed: It's good to be rich. Now as much as ever.


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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.