The wealthiest American households are keeping a tight grip on their purse strings even as their lower-income counterparts are spending a lot more freely when they emerge from weeks of lockdown. That decline in spending by the wealthy could limit the whole country's economic recovery.
Researchers based at Harvard have been tracking spending patterns using credit card data. They found that people at the bottom of the income ladder are now spending nearly as much as they did before the coronavirus pandemic.
"When the stimulus checks went out, you see that spending by lower-income households went up a lot," said Nathan Hendren, a Harvard economist and co-founder of the Opportunity Insights research team.
However, the wealthy are not matching them. "For higher-income individuals, that spending is still way far off from where it was prior to COVID and it has not recovered as much," Hendren said.
That's potentially crippling because consumer spending is a huge driver of economic activity. In fact, so much of the country's economy depends on shopping by the top income bracket that the wealthiest 25% of Americans account for fully two-thirds of the total decline in spending since January.
The wealthy aren't holding back because they don't have the money. By and large, they have lost fewer jobs and aren't the ones who are worried about making rent.
They have a lot of discretionary income and before the pandemic were spending a significant chunk of that going to nice restaurants, the theater, or traveling and staying in nice hotels. Those are precisely the things that have been off-limits since the coronavirus hit.
That makes this very different from an ordinary recession, when spending on higher-touch services doesn't dry up so quickly. And those experiences are usually a lot more expensive than food and other essential items, which the rich and poor alike have continued to spend on, but also make up a smaller portion of upper-income household budgets.
Hendren and his colleagues found that businesses that deliver in-person services in wealthy neighborhoods have seen the biggest drop in sales and are struggling to recover, while a retail store or takeout restaurant in a poorer neighborhood might have seen some decline but is starting to come back now.
Retail sales bounced back in May after a steep drop in March and April, when the pandemic took hold in the United States. Federal Reserve Chairman Jerome Powell pointed to the spending numbers as evidence that federal efforts to prop up the economy are working.
But Powell, who was speaking before the Senate Banking Committee on Tuesday, also cautioned that businesses that rely on delivering personal services may not recover anytime soon.
It spells trouble for the people who work in those nice restaurants or other service-oriented businesses. Hendren's team found big job losses specifically among workers, many of whom don't make a lot of money but who worked in high-income neighborhoods.
Many of those jobs may not be coming back anytime soon. And because it's not a lack of money that's keeping the rich from spending, the usual tools the government might use to fight a recession are not terribly helpful here.
"From the perspective of people who are not living paycheck to paycheck, the main concern here is really fighting the virus," Hendren said. "Unless we remove the threat of getting sick or getting your family members sick, it's hard to imagine that that spending will recover to the pre-COVID levels."
Since a vaccine or effective therapy for the virus could be a year or more away, both Powell and Hendren suggested that people who have lost jobs in those businesses may need additional help from the government.
"There are going to be an awful lot of unemployed people for some time," Powell cautioned.
NOEL KING, HOST:
In order for the U.S. economy to work well, Americans have to spend money. But the wealthiest Americans are not spending money the way they were before the COVID-19 pandemic. Harvard researchers have been tracking spending patterns, and our chief economics correspondent, Scott Horsley, has been looking at what they found. Hey, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Noel.
KING: So retail sales are rebounding, but not among everyone?
HORSLEY: That's right. As you mentioned, consumer spending is ordinarily a huge driver of economic activity in the U.S. We saw it nosedive in March and April, when we had the coronavirus lockdown. It started to bounce back in May, but it's not bouncing back evenly, either across the country or across the income spectrum. Nathan Hendren and his colleagues at Harvard have been studying credit card data, and what they find is people at the bottom of the income ladder are now spending almost as much as they were before the pandemic started, but not so people at the top.
NATHAN HENDREN: When the stimulus checks went out, you see that spending by lower-income households went up a lot. Spending by higher-income households didn't go up by as much. And then more recently, you know, just in the course of the past month, for higher-income individuals, that spending is still way far off from where it was prior to COVID and has not recovered as much.
HORSLEY: In fact, Hendren says fully two-thirds of the total decline in spending since January is from people at the top of the income ladder - the wealthiest 25%. And because the wealthy control a big portion of U.S. spending, that's been a big drag on the broader economy.
KING: If rich people are so rich, why would they not be spending money?
HORSLEY: Not lack of money, by and large. These are not folks who've lost their jobs or who were worried about paying the rent. They are people, though, with a lot of discretionary income. And before the pandemic, they were using their discretion to spend a lot of that money on nice restaurants or the theater or travel or maybe staying in hotels, precisely the kinds of things that have been off-limit since the coronavirus hit. And that makes this very different from an ordinary recession, where spending on services is usually stable. Hendren and his colleagues found that businesses that deliver in-person services in wealthier neighborhoods have seen the biggest drop in sales, whereas retail stores and maybe takeout restaurants in poorer neighborhoods did see a little bit of a decline, but now they're seeing a stronger rebound.
KING: So what does that mean for economic recovery in this country?
HORSLEY: It spells trouble for the people who work in those nice restaurants and those other service-oriented businesses that cater to the wealthy. Hendren's team found big job losses among workers in high-income neighborhoods, much bigger than the job losses in poorer communities. And many of those jobs in wealthy areas may not be coming back anytime soon. You know, because it's not a lack of money that's keeping the rich from spending, the kind of tools the government usually uses to stimulate spending in a recession are not terribly helpful here.
HENDREN: From the perspective of people who are not living paycheck to paycheck, the main concern here is really fighting the virus. And unless we remove the threat of getting sick or getting your family members sick, it's hard to imagine that spending will be covered to the pre-COVID levels.
HORSLEY: We know from the public health experts that removing that threat could take a long time. Federal Reserve Chairman Jerome Powell warned a Senate committee yesterday that while, you know, retail sales have picked up some and there's been some pickup in jobs, there could still be millions of people out of work for an extended period of time. And the Fed chairman suggested they might need some additional help from the government.
KING: NPR's Scott Horsley. Thanks, Scott.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.