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The writer is chief executive of Meredith Whitney Advisory Group
Watchers of the American economy are likely to get confirmation next week of what many of us know anecdotally to be true: well over 50 per cent of US households have been worse off over the past year than they were four years ago.
The US Bureau of Labor Statistics will release its Annual Consumer Expenditure Survey, and I estimate that it will show the 2023 after-tax income for over 50 per cent of US households, not only below 2022 levels, but below 2021 and 2020 levels as well.
Over the past two months, companies from Dollar General and Dollar Tree to McDonald’s have spoken about a weakened US consumer. Dollar General stated that their consumers were “cash strapped” and “worse off than they were six months ago.
I believe the underlying data may be even worse than it appears. The fact is that 2023 will be the first fiscal year of data without any consumer Covid stimulus subsidies.
The year 2021 was the only one of the past four to reflect 12 months of such stimulus. Both 2020 and 2022 only reflected 6 months of support.
Pre-tax incomes for households earning less than $70,000 a year moved very little over the past four years, but after-tax incomes, benefiting directly from tax-free Covid stimulus subsidies, increased between 8 and 28 per cent between fiscal 2019 and 2021.
When the BLS survey data was released last year, it showed only modest year-over-year declines in after-tax income for these same households, barely 2 per cent.
However, when the new data is released, I believe the year-over-year declines will be more severe, particularly compared with 2021 data. It will become increasingly clear why companies like Dollar General saw such meaningful changes in customers over the past six months.
The obvious question then is why the US economy is still so strong? I believe the strength is due to two specific groups driving consumer spending: the top-earning households and a uniquely subsidised group.
American Express data shows Generation Z and millennials spending at a rate of five times those of baby boomers. They have the wherewithal to spend on things like French-press coffee, Instagrammable leisure experiences, online gaming and sports betting as well as yes, avocado toast.
First, the top-earning households saw next to no impact from the Covid stimulus subsidies. For households earning over $100,000, while pre-tax earnings dipped modestly for the top earners, after-tax earnings stayed relatively constant between 2019 and 2022.
Households earning over $150,000 a year represent 17.5 per cent of all households in the US. Their spending has remained constant, even if it has shifted from discretionary items to essentials over the past year.
The generation aged between 24 and 38 represents 20 per cent of the US population and has the most discretionary spending power of any other age cohort. They have and continue to benefit from a different type of subsidy: their parents.
The spending power of the this generation should not be underestimated. They are driving spending in some of the fastest-growing categories of discretionary spending.
Many don’t own homes, more live at home with their parents than at any time on modern record, and over half still remain on their parent’s cell phone plans, and other shared cloud services, among other parent-subsidised expenses.
Each of these contributes to a large arsenal of spending power. For example, for most households, housing-related expenses (rent equivalent, insurance, property taxes, utilities, and other home-related expenses) represent their single largest expense.
However, nearly 20 per cent of men and nearly 12 per cent of women aged 24-35 still live at home with their parents and likely pay very little of these expenses.
As long as these trends continue, this age cohort will remain the key driver of discretionary spending in the US. It’s no wonder why there is so much debate over the real state of the US economy.
For over half of the country, I expect the coming BLS survey will show after-tax incomes are down while prices are up, making living standards feel undeniably worse off.
However, for a smaller group yet a critical driver of consumer spending, very little has changed for them economically. Their subsidies continue.