Bee American ExpressConsumers continue to open expensive credit cards and spend on luxury items such as travel. But for lenders UpstartThere is a surge of interest in microloans as Americans try to make ends meet with little money.
This combination underlines the growing perception of the division between income groups in America. And adds to the increasingly popular view that the US is experiencing a 'K'-shaped recovery since the end of the pandemic, with higher income brackets reaping most of the benefits and lower-income Americans treading water or falling behind.
It has led to a confusing picture of the U.S. economy that could affect everything from how the Federal Reserve will move interest rates to who Americans will vote for in November. Moreover, some worry that this will threaten the surprisingly resilient economy that has been a global miracle. And it comes at a unique time: consumers are once against leaning on debt and many are starting to crack.
“Our consumers are doing very well,” American Express CFO Christophe Le Caillec told DailyExpertNews last month, citing spending on flights and dining out. “They're definitely enjoying life.”
The typical American Express consumer is affluent and shows every sign of pushing ahead despite persistent inflation and ongoing economic uncertainty. More than three million new credit cards were issued in the past quarter – sometimes with annual fees running into the hundreds of dollars. US cardholders as a whole have spent 8% more in the past three months.
Airline spending on American Express cards rose 9% in the first quarter from the previous quarter, underscoring the continued willingness to pay for experiences. First class travel has shown particular strength, although management noted that this is partly related to a resurgence in business travel. That can also be a good sign for white-collar workers, because it shows that companies are willing to spend money on travel again.
But the behavior of some Upstart customers paints a different picture of the same economy. The company on Tuesday reported an 80% increase in new loans to $2,500 during the first quarter. These “relief loans,” as management describes them, have been used for expenses such as rent and other regular bills, according to chief product manager Blair Lanier.
People who take out these loans are more likely to have lower incomes and have no more than a high school diploma, Lanier said. Some may turn to these small loans after being turned down for larger amounts by other lenders, but Upstart has also made changes to its automatic approval processes, the company said. (These loans are fixed fee products with an annual interest rate of up to 36%.)
“The last two years have been a unique, specific and unusual event in the macroeconomy,” Lanier said. “I'm not as surprised that there is significant existing demand for a product like this as much as that demand would be visible now.”
Lower level wrestling
Americans like those turning to Upstart's microloans are buckling under mounting financial pressure.
The end of Covid-era fiscal stimulus and the resumption of student loan payments have undermined savings built up early in the pandemic. Rising gas costs can be particularly painful for those without remote work privileges. On the other hand, higher-income consumers may also feel buoyed by rising home prices and strength in the stock market.
Lower-income households make up a large portion of the country's population, which may help explain the sour economic sentiment in general. The University of Michigan's consumer confidence index fell more than 12% between April and May alone as consumer expectations for future inflation rose, data released Friday showed. Although the index came in well below economists' expectations, it was still well above the previous year's reading.
Some economists couldn't explain the change in the closely watched survey, but it comes at a time when many have seen funds dry up on rainy days. Excess savings among Americans peaked above $2 trillion in August 2021, according to data analyzed by the San Francisco Federal Reserve. But that cushion has been completely depleted in subsequent years as financial pressures have increased, with US households owing a total of $72 billion as of March.
At the same time, costs for a variety of goods and services have risen. Although the rate of inflation has cooled from the highest levels in recent years, prices continue to rise faster than monetary policymakers consider healthy for the economy.
Given these factors, economists are surprised at the continued urge to spend. But the long-awaited consumer slowdown is finally visible in a large number of household brands, especially those frequented by lower income groups.
McDonald's said it is adopting a “street-fighting mentality” and is “laser-focused” on value after higher prices pushed away diners with less to spend. Soft drink and snack manufacturer PepsiCo recognized that low-income Americans are “stretched.”
Tyson Foods frozen chicken products.
Daniel Acker | Bloomberg | Getty Images
Manufacturer of frozen products Tyson Food has seen that consumers have started eating at home more than the quick-service restaurants they supply. Management said lower tax brackets in particular have been switching to Tyson brand private labels when shopping.
That's part of a trend known as “trading down,” which could indicate consumers are tightening their purse strings. Market data provider Adobe Analytics has seen this behavior online over the past four months in numerous categories, including personal care, electronics, apparel, furniture and groceries.
Furniture e-commerce platform Honestly said sales of high-end items were particularly weak. Toolmaker Stanley Black & Decker lamented soft consumption trends and interest in DIY projects.
A hot labor market and rising wages are seen as a source of optimism among this consumer base, despite growing uncertainty elsewhere. But last month's shockingly weak jobs report and recent surge in unemployment claims may be one of the last reasons lower-income Americans are feeling good about the economy.
'We see a much more cautious low-income consumer' Citi Group CEO Jane Fraser told DailyExpertNews's Sara Eisen this week. “They are feeling more pressure from the cost of living, which has been high for them and has been rising. So while there are employment opportunities for them, the debt burdens are higher than before.”
Fraser is one of many business leaders and economists who point to the “K” shape of consumer habits. In this environment, the upper crust continues to spend while the less fortunate now struggle with higher price tags and interest rates.
Put another way, middle- and high-income consumers are “optimistic,” while low-income consumer confidence is in “recession territory,” according to Nancy Lazar, chief economist at Piper Sandler. She said the discrepancy could derail hopes for a “soft landing,” which is a target outcome in which inflation is tamed without sending the economy into a period of prolonged contraction.
It's also important to remember that lower-income Americans felt financial pressure before the pandemic, says Tyler Schipper, an associate professor of economics at the University of St. Thomas in Minnesota. While the group has made up ground amid the labor shortage, he said a return to more murky waters makes sense as the economy continues to unravel after the shock of 2020.
“They started from a difficult situation,” Schipper said. “This idea of lower-income workers looking for the best prices, I think, is in some ways a return to normalcy.”
Schipper said evidence of price matching or downside trading could be good news for the Federal Reserve, which is looking for signs that previous rate hikes have had the intended effect of tightening the economy.
The upper class hums along
Higher earners, even though they make up a smaller share of the population, remain in trouble, and this could make a difference for some companies.
Airlines have been expanding business class and premium economy cabins and expanding lounges for years to accommodate larger expenses. Delta Airlines has said sales of those cabins have surpassed economy class. Based in New York JetBlue Airwayswhich is much smaller than its major rivals, said this week it is cutting back on some flights to instead offer more business class seats on routes to the Caribbean.
Bookings of holding companies said customers won't sacrifice higher-rated hotels or longer vacations. Airbnb interest in traveling to events such as the Olympic Games in Paris and the European Cup in Germany this summer.
Airbnb management emphasized the thirst for experiences among its customer base. In the same vein, Ticketmaster parent Living nation said it sees “no weakness” in demand.
Theme park chains Six flags And Cedar purse both saw stronger-than-expected attendance in their most recent quarters. Six Flags said the number of 2024 season passes sold through April grew by double digits compared to the same period a year earlier.
Guests ride a roller coaster at Six Flags Magic Mountain theme park in Valencia, California, USA on Saturday, November 4, 2023.
Eric Thayer | Bloomberg | Getty Images
Unlike Wayfair, Garmin sees strength in sales of its higher-end products. The company pointed to the fact that fitness segment revenue grew 40% compared to the same quarter in 2023, mainly thanks to wearable technology.
“We've actually seen very strong responses to some of our high-end products,” Garmin CEO Cliff Pemble told analysts earlier this month. “People buy based on their needs, and we haven't seen much evidence of mixing that we can point to with confidence.”
Where is the weakness?
This divergence even occurs within sectors. Look no further than Planet Fitness And Lifetime.
Planet Fitness, known for its memberships starting at $10, has seen a “shift in consumer focus” toward savings in 2024. For the premium gym chain Life Time, clubs have waiting lists and the demand for personal training is at record levels.
“I personally expected to see some weakness over the last 18 months, and I was wrong,” Life Time CEO Bahram Akradi told analysts this month.
— DailyExpertNews's Kate Rooney, Amelia Lucas, Brandon Gomez, Robert Hum, Jeff Cox, Leslie Josephs and Hugh Son contributed to this report.