The richest Americans are on a spending spree. It may help US avoid a recession this year

As the stock market has tumbled and recession forecasts have mushroomed, Ted Adams of Minneapolis has stepped up his spending.

Adams, 80, recently bought a Mercedes-Benz S Class for his vacation home in Palm Desert, California, to go along with the Mercedes and Jaguar he keeps in Minneapolis. He and his wife dine out once a week, up from twice a month last year, and they took a weeklong trip to a resort in northern Minnesota, renting cabins for themselves and each of their three children, after forgoing travel during the pandemic.

Although the S&P 500 index is down about 14% from its December 2021 peak, “Every single time. the market comes back stronger than ever,” says Adams, a retired founder of several medical start-ups. “I’m not too worried about it. It’s going to come back.”

Even as many Americans have trimmed their spending to cope with high inflation and interest rates, the affluent are still splurging, bolstering hopes that the U.S. can dodge a recession or endure a mild slump. Consumer spending makes up 70% of economic activity and the wealthy account for nearly half of those outlays.

“They are a critical part of any optimism that the economy can manage through this without going into a recession,” says Mark Zandi, chief economist of Moody’s Analytics.

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The robust spending patterns of the well-heeled are defying predictions that a widely expected downturn this year could take a bigger toll on rich people than on typical households. Those forecasts were partly rooted in a stock market that remains well below its all-time high despite a modest comeback this year and projections of falling home prices amid a housing slump.

Also, the well off, for the most part, haven’t benefited from the federal stimulus checks distributed during the pandemic, or the sharp pay increases that restaurants, hotels and other businesses have doled out to blue-collar workers to combat persistent COVID-related labor shortages

What is the meaning of richcession?

Early this year, Wall Street Journal reporter Justin Lahart coined the term “richcession” to describe a downturn that would hit the well-to-do harder than ordinary Americans.

But at least so far, that scenario hasn’t played out. In the fourth quarter of last year, outlays by the top 10% of Americans based on income accounted for 45.5% of consumer spending, up from 44.0% in the third quarter, according to government and Moody’s data. Spending by that group increased 3.8% during the last three months of the year, compared to a 1.3% rise for the bottom 80%.

To cope with inflation, low- and middle-income households are relying more heavily on credit cards. U.S. consumers racked up a record $180.3 billion in new credit card debt last year, according to WalletHub. That will likely force them to spend more cautiously this year, Zandi says.

Although a key measure of retail sales that excludes volatile categories was boosted by favorable weather in January and February, economists expect the government to report Friday that retail sales fell 0.4% in March as consumers took a breather. And economists predict consumer spending overall will rise 1.4% this year, down from 2.7% in 2022, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.

Yet that should be enough for the nation to avoid recession or possibly slip into a modest slump as rising spending by higher-income Americans offsets stagnant purchases by everyone else, Zandi believes.

There's a caveat. Things could go south if layoffs largely battering the tech industry spread and job losses mount, says Katie Thomas, head of the Kearney Consumer Institute, a think tank at consulting firm Kearney. That could prompt even wealthy consumers to pull back and further hobble the economy, she says. 

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What is meant by the wealth effect?

Normally, a substantial stock market slide leads to a drop in spending, a dynamic known as a negative wealth effect. Theoretically, at least, for each $1 decrease in wealth, outlays on average fall by 2.5 cents, Zandi says.

Yet the share of income saved by the top 10% of income earners declined to 6.8% during the last three months of 2022 from 9.3% the prior quarter, underscoring that the affluent are spending more, not less, the Moody's figures show.

“A wealth effect is not at all evident,” Zandi says.

That’s partly because affluent people still have lots of extra savings they socked away during the health crisis by scaling back on travel, restaurant visits and other activities, a sum that supplements their already significant cash reserves. They spent $582 billion of that additional cash last year but still had $689 billion left as of early January, a trove that’s more than offsetting the market pullback, Zandi says.

They also have lots of pent-up demand.

“People are coming out of COVID,” says Kearney's Thomas. “Higher income consumers are still spending.”

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In the early days of COVID, amid health concerns and economic uncertainty, Adams and his wife scuttled trips to their California vacation home, hardly dined out and put off the purchases of the Mercedes and furniture.

Now, they’re eager to spend again and have the money to do it.

“I’m getting older,” Adams says. “I can’t spend it all anyway.”

Ray Tyc, of Jackson Hole, Wyoming, says he and his wife have meticulously saved for their retirement over 40 years.

This year, the couple bought $11,000 kitchen counters, a $50,000 car and an $1,200 snow blower. They’ll also take a couple vacations this summer, says Tyc, 69, who describes himself as upper middle class. They dine out two to three times a week.

“Now our resources are working for us,” he says.

What is an earnings recession?

While corporate earnings are expected to show a decline for the second straight quarter in the January-March period, some companies that cater to the wealthy are bucking the trend.

LVMH – the French owner of luxury brands such as Louis Vuitton, Tiffany and Christian Dior – this week reported a 17% jump in its fiscal first quarter revenue. Although there could be a mild recession, it’s likely “the economy doesn’t sink like a lead balloon because the affluent and wealthy continue to spend,” says Milton Pedraza, CEO of the Luxury Institute, a research and consulting firm.

Meanwhile, more mainstream brands are expanding their offerings to target higher-income consumers. Wal-Mart is featuring $90 creams in its beauty aisles at certain stores. Heinz released a line of condiments called Heinz 57, including an 11.25 ounce container of infused honey with black truffle that costs about $7. And Colgate Palmolive announced a $10 three-ounce stain remover toothpaste.

“We’re at a point where every company is trying to figure out how to get growth,” says Marshal Cohen, chief industry advisor at market research firm Circana. Currently, that means appealing to higher-income shoppers, he says.

Contributing: Associated Press