Data Shows Split in Consumers Spending Based on Incomes

One of the more honest economists was John Kenneth Galbraith and he famously stated that there are two kinds of forecasters — those that don’t know and those that don’t know they don’t know. Never has this been a more accurate assessment as there has been an unusual amount of uncertainty over the last few years.

Where are we now? The classic economist’s response is “it depends.” Many of the surveys of consumer attitude are quite negative as many are worried about the impact of inflation, the state of the job market and the state of the global supply chain. At the same time the raw data is painting a much less dire picture. The question is whether the data has not caught up with consumer sentiment or have the consumers not caught up with the data.

The Q3 GDP data is stronger than expected — the latest assessment from GDPNow has it at 3.8% and that is nearly a full point more robust than the twenty-year average. The unemployment rate remains at record low levels — 4.3%. That is barely higher than it was a year ago and “normal” is still thought to be 6%. The rate of inflation is certainly higher than it was a year ago but it is only 2.9% (core is at 3.1%). The Fed’s preferred target for inflation is 2% so this current level is not that far off that target. Retail numbers are strong as the holiday season gets into full swing but concerns have emerged regarding how long the consumer will keep spending.

Part of what has been driving this divergence has been the division between sets of consumers. Economists have been called this a “K” recovery. Those in the upper third of income earners are still spending aggressively and that has been keeping retail growing. They notice inflation but it has not affected their buying behavior much.

In contrast, those in the lower third have been decked by inflation and have essentially been living paycheck to paycheck. That leaves the middle third and thus far they are still spending as long as they think their jobs are secure. In an era of labor shortage, many assume they can keep their job or find another one easily. The quit rate as measured by the JOLTS report is at 2% and that is fairly high. It is a measure of the number of people willing to quit and go in search of another job.

This article is part of a two-part feature where Southern PHC asked economists with different perspectives to weigh in on economic conditions. Read the accompanying article by Devin Bell, associate economist at ConstructConnect.