This is a very good article that breaks out the impact of economic factors on different income levels. It shouldn’t be a surprise that Macroeconomic averages hide details. To their credit, the Wells Fargo economic analysts use many different data sources to tease out the effects.
https://wellsfargo.bluematrix.com/links2/html/99ebdc7f-f4bc-45f9-92b9-97641ecda946
Wells Fargo Economics, January 17, 2025
Fears for Tiers: Consumer Health by Income Group
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Earnings of workers in less-well-paid industries have trailed behind those in better-paying work. Households at the lower end of the income distribution are also facing a stiffer inflation environment today, that may only become more challenging in the wake of tariffs. Meanwhile, the so-called resilience of the consumer in this cycle owes much to the fact that households are burning the candle at both ends. Credit reliance is up and saving rates are down. What appears as stout spending today comes at the cost of more vulnerable finances for the working poor…
The real purchasing power of those toward the lower end of the income spectrum is being hit as wage growth slows faster for these workers and at the same time they face a stiffer inflationary environment. Higher credit card delinquencies signal consumer fragility, while lower saving rates are slowly chipping away at the medium-to-longer term financial health of this segment of the population as they are less able to save for the future. The fact that net worth is higher and that broad leverage ratios remain in check is cold comfort for the households relying on credit cards to sustain spending, especially as they face elevated interest rates. The future also looks set to bring an untoward challenge for lower-income consumers given the regressive impact of tariffs…
This not only presents a challenge for those struggling to make ends meet, but it creates a particular problem for businesses that cater to lower-earning individuals. It may also have an under-appreciated sway on policymakers at the Federal Reserve as they weigh the benefits of wringing out the last bit of inflation with the cost of further cooling in the jobs market…
The risk of a sharp deterioration in the labor market has eased significantly since this past summer. But concerns about an overly-restrictive stance of policy damaging the jobs prospects of those least able to afford a loss in employment may compel the FOMC to accept inflation running somewhat above its 2% target for a little longer, and not be so quick to rule out further rate cuts this year… [end quote]
Because higher-income households spend so much more than lower-income households the analysts do not see a recession coming unless those higher-income households’ spending is significantly reduced (barring a crisis).
A higher inflation rate will increase the interest yield from TIPS and I-Bonds. If the Fed cuts the fed funds rate despite a higher-than-desired inflation to support the lower end of the job market the stock market will also benefit.
Wendy
