More on bifurcated US consumers

Posted by Cardiff Garcia on Jun 28 13:47.

Advertising Age on Monday had a look at the contrast in spending patterns between upper-income America and, well, everyone else:

Overall, [the Consumer Edge Research] “Willingness to Spend” index of U.S. consumers has fallen fairly steadily from 103 in May 2010 (just before the so-called summer of recovery) to 96 last May, where 100 equals sentiment levels in December 2009. But willingness to spend has been on the rise lately among the high-income segment — that 16% of the U.S. population making $100,000 or more annually. Their spending sentiment index rose from 118 in December to 131 in May. Their index is down 6 points from 137 a year ago, but they’re the only income group more willing to spend now than they were in December 2009.

This bifurcation of US consumers is a topic we’ve wondered about now and again, though the evidence for it remains somewhat limited: it mostly consists of surveys like the one above and of comparing the earnings of luxury retailers against those of mass-market companies. (Once a year the BLS publishes the comprehensive Consumer Expenditure Survey, but the most recent version is only updated through the end of 2009.)

But even anecdotal evidence can be telling, and AdAge cites research from Sanford Bernstein that looks at how companies with consumers of above-average incomes are reacting to this perceived change:

Estee Lauder, whose consumers on the whole earn 19% higher than the U.S. average, according to Bernstein research, has been thriving with double-digit organic sales gains the past year. CEO Fabrizio Freda revealed at the Consumer Analyst Group of New York in February that the company has been looking into raising prices, not because it particularly needs to, but because research suggests it can.

And more recently…

One reason Procter & Gamble Co. is confident its current round of price hikes to recover commodity-cost increases will stick more readily than those taken in 2008 is that at least this year, wealthier folks are more confident. “You saw the whole affluent class come out of the market in 2008, and what we’re seeing now is a very strong resurgence of the affluent class,” said P&G Chief Financial Officer Jon Moeller at a Deutsche Bank investor conference in Paris June 15.

Derek Thompson also points to Gallup data showing the difference in self-reported spending between Americans making more than $90,000 and those making less:

As you can see, daily spending for middle- and lower-income Americans has been flat all year, while that of high-income individuals has fluctuated more, and the latter appears to have climbed impressively in May. We’re a bit sceptical of these self-reported measures — but they’re not bad indicators of how consumers perceive their situation, even if the precise numbers are questionable.

So how does this fit into the ever-perplexing US consumption story?

We’re not sure, but we can venture a few informed, somewhat obvious guesses.

We know that rising energy and food prices hurt low- and middle-income earners disproportionately. And so it makes sense that their consumption will have stagnated relative to their high-income counterparts. These are also the consumers less likely to have benefited from the stock market gains we saw from the middle of last year until the recent  pullback. Home values, in which much of their wealth is tied up, have only continued to fall. And all of this is part of the ongoing deleveraging story. Some of these trends were partially offset by the bump to incomes that resulted from the December tax cut compromise, but you get the point.

In each of these cases, the impact on the spending patterns of high earners has been different. They were more likely to benefit from the stock market rally, less affected by rising commodity prices, etc.

Nobody is sure exactly what share of total spending is accounted for by high-income individuals, but some private-sector economists have estimated that the highest 20 per cent of earners account for between 40-50 per cent of overall spending.

Looking at more recent data on overall consumption, Monday’s personal income and outlays report was abysmal, showing that real spending declined in both April (after revisions) and May. This was unsurprising, if still depressing. The question is what happens now, so cue the conditionals.

If we extrapolate from the very latest trends, say, and the stock market continues its recent slump, there’s a chance high-income households will pull back a bit. The same is true if the anecdotal evidence above about companies raising their prices holds, though we suspect that this effect would be somewhat muted.

As for low-income earners, this depends on quite a few things. Jobs and wages, to begin with, and the news on that front has been disappointing lately (an understatement). As Daniel Indiviglio points out, Americans appear to have embraced a recession-like mentality in April and May, which is deeply troubling in a recovery — and much more so in a recovery that’s coming off such a deep recession.

If you’re reaching for some good news, spending does also depend on inflation, whose direction has itself been difficult to discern — but there is some room for hope. Inflation expectations have fallen hard lately, with headline inflation moderating along with the recent decline in commodities. Gas prices in particular, which in the past few years have accounted for nearly all of the gap between core and headline inflation, have been falling for nearly two months now. So it’s possible that the extra pocket money will have a favourable effect on spending in the second half of the year, as some economists have noted.

There are also strategists (those at Barclays Capital come to mind) who believe, along with Federal Reserve chairman Ben Bernanke, that we’ll see a snapback in some of the economic indicators that have disappointed in the first half of the year — the “transitory” story. If so, a big part of that story would have to be a resumption of increasing spending activity.

We certainly won’t rule it out, but given how few reasons for optimism we’ve had lately, neither would we bet on it.

Related links:
Consumer divide grows between haves and have-nots – Advertising Age
Household deleveraging and consumer-led growth
– FT Alphaville
The perplexing US consumer – FT Alphaville

This entry was posted by Cardiff Garcia on Tuesday, June 28th, 2011 at 13:47 and is filed under Capital markets. Tagged with , .

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