black and white photo of wealthy couple from the golden era

Pity the rich: households earning more than $125,000 have seen their incomes and discretionary spending decline faster during the current economic malaise than those of households classified as low-income, according to Bank of America (BoA).

Credit-card spending by high-income households has dropped below that of middle- and lower-income groups since 1 January, the bank reported.

Total credit card spending declined in April, year on year, marking the first downward month since February 2021. Sales of luxury fashion slumped 15 percent and lodging more than 3 percent, both year over year. Airlines’ ticket sales slipped 4.5 percent from March.

The March drop in U.S. retail sales was twice what economists had predicted.

The shift is a potential sign of trouble for the economy: the highest-earning 40 percent of households account for 60 percent of the consumer spending that sustains the U.S. economy, Yahoo Finance noted.

Also, layoffs among the highest earners rose 40 percent in April, year over year, BoA said, five times greater than for lower-income groups since the beginning of this year.

The bank derived its data from direct deposits in customers’ accounts across 30 states.

“A labor market slowdown driven by the higher end of the income scale could have an outsized impact on the overall economy,” BoA analysts wrote in a note to clients.

“The labor market is beginning to soften from a very buoyant initial position, so it will likely take quite some time before the full impact on consumer spending comes through,” the note added.

“Consumers are relying increasingly on credit and stockpiled cash to finance their purchases,” chief economist Jay Bryson at Wells Fargo wrote in a 27 April note to clients. “These factors are not sustainable.”

Bryson foresees “a recession of moderate severity” beginning in the second half of this year.

“The earnings season in retailers is going to provide the most opportunity for the individual investor to see what comes next,” J.J. Kinahan, CEO of IG Group North America, said in a Yahoo Finance interview last week. 

“The most important part is going to be those CEO comments,” he added.

TREND FORECAST: Of course wealthy households will cut spending more than poor ones—poor people have no discretionary spending to cut.

The broader point: despite the Fed’s best efforts, the odds are greater than not that the U.S. will experience a Dragflation within the next 12 months; declining economic growth and rising inflation.

The reason: consumer spending props up two-thirds or more of the country’s economy. With credit card debt closing in on a record $1 trillion (“Credit Card Debt Nears $1 Trillion, Sets Record” 7 Feb 2023) and consumers draining their savings accounts (“Americans Drain Their Savings to Keep Spending” 12 Oct 2022), households’ ability to spend at current rates is running out.

When those sources of funds dry up—and they will disappear faster as higher-income earners lose their jobs—the economy will tumble into recession.

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