At Least the Rich Are Spending

A consumer spending recovery has stalled for most Americans -- but not for the rich. Upper-income Americans increased their buying by an amazing 33% in May, according to Gallup. Meanwhile, spending was flat for everybody else. What's going on here?

First, let's look at the charts Gallup provides. First, for the upper-income consumers:

upper income spending 2010-05.gif

And then for the lower- and middle-income consumers:

low mid income spending 2010-05.gif

As you can see, each group spent very differently in May. For upper-income consumers, Gallup says that $145 per day is the highest monthly average since November 2008. May's spending was 33% higher than both a month and year prior.

But for everybody else, spending remained subdued. In May it was flat at $59 per day versus a month and year earlier. It was only a dollar higher than in March. So what's driving the wealthy to spend but the low- and middle-income Americans to refrain from making additional purchases?

It wasn't the wealth effect. If the rich felt wealthier in May due to their investments doing well, then they might have felt more comfortable spending. Yet, if you look at the stock market, that doesn't seem particularly plausible. Stocks had a pretty rotten time in May, as the Dow declined by 8%. So anyone with a big stock portfolio actually would have felt poorer in last month.

Here are Gallup's theories:

It could be that many upper-income consumers are experiencing "frugality fatigue." That is, they are simply tired of cutting back and want to go back to spending -- maybe not as freely as they did prior to the recession, but at higher levels than they did last year, when frugality was commonplace. They may also be spending more freely because as recently as a month ago, many economic observers were talking about the financial crisis' being over and a sharp economic upturn taking place. Or, they may simply have decided that it is finally time to take a long-delayed vacation.

The first and second theories above probably combine to provide the answer. Wealthier Americans have more disposable income to spend since, well, they're wealthier. Tired of holding back for so long and sensing that the worst is behind the U.S. economy, they're more comfortable opening up their wallets. Low- and middle-income consumers, however, do not have as much extra disposable income to increase their spending. But they could spend a little more if they wanted. So we might see the rich feeling more confident than other Americans that their jobs and wealth are reasonably safe at this time.

From an economic standpoint, any increase in spending is a good thing -- no matter where it comes from. Since consumer expenditures make up some 70% of the U.S. economy, spending must rise before businesses will ramp up hiring. At this point, however, it looks like any growth that might result from this new spending will have to rely on the "trickle-down" effect, until low- to middle-income Americans join the wealthy in relaxing their frugality.