Why Overall U.S. Consumer Spending Has Not Collapsed: Only The Rich Are Buying; Unemployed Can't Buy

If you were wondering how it was possible that unemployment in the U.S. remains so high and yet consumer spending does not fall off a cliff, here is the answer. Consumer spending is being driven by rich shoppers masking "reluctance among less affluent Americans to join in".

The difference between the have and the have nots is striking. So says the Bloomberg today. Sales of expensive items are doing well, "Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy".

However, the poor or not so well to do shop at places like Walmart. "At the other end of the economic spectrum, Wal-Mart Stores Inc., the world’s largest discount retailer, reports “everyday Americans” are living paycheck to paycheck as they await an improvement in job prospects".

“The heavy lifting is being done by the upper-income households,” said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. “They’re the ones benefiting the most from the stock market rally, and they’re spending.”

"The uneven progress in household expenditures, which account for about 70 percent of the economy, helps explain why Fed policy makers likely will keep interest rates near zero and complete a second round of Treasury purchases. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed".

"Consumer purchases reflect bigger gains among high-income households and “financial pressures on those of more-modest means,” according to minutes of the Fed’s Dec. 14 meeting. Feroli estimates the top 20 percent of wage earners account for about 40 percent of spending, while Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, puts their contribution at closer to 50 percent."