America’s economy is splitting consumers into two very different realities


Despite near record inflation, consistent recession predictions, and rising borrowing costs, Americans continue to do what they do best—spend. Even if it means leaning on savings and credit cards, all income brackets have been taking vacations and eating out at restaurants.

To the surprise of many forecasters, real personal spending rose 1.1% in January, according to the Federal Reserve’s favorite gauge. But economists fear that with interest rates set to remain “higher for longer,” and inflation proving to be stubborn, lower and middle income consumers are beginning to feel pinched. That means we could be headed for a world where the American consumer splits into two very different camps: one for the wealthy and one for the working class.

Gregory Daco, chief economist at EY Parthenon, told Fortune that he expects to see a “K-shaped consumer spending pattern” this year where working class families slow their spending as the rising cost of living takes its toll, while wealthy families continue to splurge, “albeit with more discretion.”

He predicts that consumer spending will rise just 1% this year—after a 2.8% increase in 2022 and a 9.1% jump in 2021—arguing that hiring will slow “meaningfully” and economic uncertainty will increase, making households pull back.

“We’re still in an environment where high inflation and high interest rates are a constraint on many families. And if you look at household balance sheets, they’re in worse shape than they were even six months ago,” he said.

The Outlook: A tale of two economies

White collar layoffs have captured headlines in recent months, as Big Tech giants continue to let go of tens of thousands of employees, but wealthy Americans have a few key advantages that allow them to keep spending during tough times in a way lower-income consumers can’t.

Daco explained that white collar workers tend to have sizable savings, receive large severance packages, and get new jobs fairly easily.

“In the tech sector, for instance—and even for some financial sector employees—reemployment is much easier, either in the same sector, or in different sectors,” he said. “So an engineer that works at a big tech firm can find a job at a consulting company. Somebody that works in investment banking can find a job at another investment bank, or wealth management or financial services company. They have a little bit more flexibility.”

Lower-income Americans, on the other hand, are often forced to turn to debt when they lose their jobs or face rising costs. New data from Bankrate shows 82% of people earning less than $50,000 can’t cover one month’s worth of expenses without using credit. And some 36% of Americans now have more credit card debt than emergency savings, the most since 2011.

“It’s clear that the less-than-optimal economy, including historically high inflation coupled with rising interest rates, has taken a double-edged toll on Americans,” Mark Hamrick, Bankrate’s senior economic analyst, said of the findings. “Many have resorted to tapping their emergency savings if they have it, or have taken on credit card debt, or some combination.”

U.S. credit card balances soared 15% in 2022 and 7% in the fourth quarter alone to a record $986 billion, according to the New York Fed’s quarterly Household Debt and Credit Report—and delinquency rates are rising.

On top of that, Goldman Sach estimated earlier this month that Americans have spent over 35% of the $2.7 trillion in excess savings they built up during the pandemic—when spending slowed and stimulus checks and enhanced unemployment benefits boosted incomes. And the top 10% of earners got more than half that money anyway.

“We’re no longer in an environment where excess savings are going to be the Savior or where one can expect ongoing exceptional job and wage growth,” Daco said. “The elements of support for consumer spending, especially for those at the lower end of the income spectrum, are not going to be as strong through the rest of the year.”

With Americans’ wealth fading due to falling stock prices and declining home values as well, Daco sees “a multi-speed consumer spending outlook” as lower income consumers pull back this year while wealthier Americans will continue to travel and eat out.

An unclear timeline

Eric Freedman, chief investment officer at U.S. Bank Asset Management, told Fortune that he also believes U.S. consumers are splitting into two distinct groups, but he noted that, overall, consumers’ finances remain in good shape.

“I think that it is certainly possible that we could get that K-shaped type of spending phenomenon,” he said. “But the evidence right now does not suggest the consumer is in a really difficult spot. We would anticipate that worsening and weakening as the year goes on, but I think it’s gonna have to be a later this year story, as opposed to a right here and now story.”

Both Daco and Freedman agreed consumer spending is set to drop, but by how much will depend on the labor market. Freedman believes that although employment trends are “softening,” unless the unemployment rate rises sharply, consumer spending will remain strong at least until later this year.

But Daco noted that before January’s blowout jobs report—which pushed the unemployment rate to a 53-year low of 3.4%—hiring was slowing, and seasonal adjustments that were made to last month’s employment data might have given an overly optimistic picture of the labor market.

“We also have to note that these readings tend to be quite volatile,” he said. “There’s a big margin of error there. So yes, perhaps the labor market is still much stronger than we anticipated. But I would seriously doubt that it’s that much stronger given our conversations with business executives in various sectors.”

Business leaders Daco spoke with recently didn’t have the “desire” to keep hiring or increase wages as fast as they have this past year either. To his point, some 61% of business leaders said they’re expecting layoffs at their companies this year in a recent ResumeBuilder survey.

“What we’re hearing is the desire to rethink the proper and ideal size of one’s talent pool, rethink hiring decisions, and rethink wage growth and benefits growth in the current environment,” he said. “So there’s really much more of a focus on cost and to me that would signal further weakening of consumer spending.”

Implications for the economy and investors

Consumer spending makes up roughly 70% of U.S. gross domestic product, so if it does slow dramatically, it will have big implications for the economy and investors. But while many billionaire investors and business leaders believe this means a recession is all but guaranteed, EY Parthenon’s Daco isn’t so sure.

He argues that the outlook for the U.S. economy is “uncertain” and while it could be headed for a “mild recession,” he doesn’t see “broad-based layoffs” as likely. And U.S Bank Asset Management’s Freedman doesn’t foresee an outright recession either.

“Our economics team is calling for a slowdown, but not a recession,” he said. “We think that it’s going to probably be a longer slowdown, if you will, but not necessarily a deep slowdown.”

For investors, the CIO said he was a “big fan” of the infrastructure and utilities sectors, which should benefit from recent legislation, and argued tech stocks may be a good long term investment, but it’s not a good time to buy. Like other Wall Street investors, Freedman also pointed to the value of simply holding cash in the form of U.S. treasuries due to the risky economic environment.

“You can invest in six month treasuries that yield over 5.07%. That’s a pretty significant hurdle for investors to move away from,” he said. “It’s an absolute real yield. That’s attractive, no doubt.”

This story was originally featured on

More from Fortune:

5 side hustles where you may earn over $20,000 per year—all while working from home

Millennials’ average net worth: How the nation’s largest working generation stacks up against the rest

Looking for extra cash? Consider a checking account bonus

This is how much money you need to earn annually to comfortably buy a $600,000 home


Please enter your comment!
Please enter your name here