The Impact of Affluent Americans on the US Economy
Affluent Americans, particularly older individuals, are playing a significant role in driving the US economy and potentially delaying the need for Federal Reserve rate cuts. This trend is evident in the increased consumer spending and the subsequent boost to various sectors of the economy.
Changing Spending Habits
Retirees like Joan Harris, who now have more disposable income, are choosing to spend their money on luxury experiences such as travel, healthcare, and entertainment. The growth in their spending is contributing to the overall economic growth of the country.
Joan, a 64-year-old engineer from Albuquerque, New Mexico, has been able to indulge in her travel desires since retiring. She visits her adult children in different states a few times a year and has planned trips to a science fiction convention in Scotland and a Disney cruise. She has even upgraded her travel accommodations, opting for first-class plane tickets and higher-level suites.
This change in spending habits is driven by a realization that life is short and that experiences should be enjoyed while one is still able to do so. Joan’s perspective shift, influenced by the aging process and the passing of her parents, has motivated her to spend her money on experiences that bring her joy.
The Impact on the Economy
The increased spending power of affluent older Americans, combined with the significant gains in the stock and housing markets, has resulted in a larger share of consumer spending than ever before. Consumer spending is a key driver of economic growth.
Furthermore, the spending patterns of affluent older Americans are less affected by the Federal Reserve’s efforts to slow down the economy and control inflation through higher interest rates. This is because their spending often does not require borrowing. In fact, those who own government bonds may even benefit from the Fed’s rate hikes, as higher bond yields generate more income for bondholders.
The “wealth effect” is another factor contributing to the strength of the economy. Rising home and stock values give people confidence to increase their spending. This unexpected strength in the economy, along with stickier inflation, has caused a shift in the Federal Reserve’s plans.
The Federal Reserve’s Response
Initially, the Federal Reserve had projected three rate cuts for this year. However, the sustained strength in the economy, fueled by the spending of affluent older Americans, has led to higher inflation measures. As a result, the Fed is hesitant to cut rates, as they are not confident that inflation will sustainably ease.
The Fed’s benchmark rate is expected to remain unchanged at a 23-year high during their upcoming meeting. The 11 rate hikes that have occurred have increased borrowing costs across the economy, affecting various sectors such as home and auto loans, credit cards, and business loans.
Despite the higher borrowing costs, the net worth of affluent households continues to grow due to the rising stock and home values. Household wealth has grown at an average rate of 5.5% per year in the decade after the 2008-2009 recession, and this growth has accelerated to nearly 9% since 2018.
Overall, the spending habits of affluent older Americans, combined with the strong performance of the stock and housing markets, have contributed to the sustained growth of the US economy. This growth has led to a reevaluation of the Federal Reserve’s plans for rate cuts, as they prioritize controlling inflation and maintaining economic stability.
