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Even after years of inflation, geopolitical chaos and recession in Europe, the US economy remains robust and resilient.
The reason for that is mostly the American consumer, with spending accounting for about 70% of gross domestic product.
But some observers now worry that the economy represents a tale of two Americas. Some businesses and consumers continue to thrive, while others are falling by the wayside.
What's happening: Economic activity in the US remains relatively strong, but there are some signs that the momentum is beginning to cool.
Unemployment rose to 3.9% last month, lower-income consumers are spending less and businesses are limiting employee hours and pay.
Consumer growth in general is beginning to moderate, but gently.
"That may mask more pronounced financial difficulties for the bottom three income quintiles facing the strenuous combination of higher prices, larger interest burdens and softening job prospects," said EY chief economist Gregory Daco in a note on Tuesday.
While consumer balance sheets are still holding strong in aggregate – the US has added $40 trillion in wealth since the start of 2020, and Americans haven't stopped spending — not every balance sheet looks the same.
"The economy is bifurcated into the haves and have-nots, as middle class Americans are struggling with rising prices and lagging wage growth," said Skyler Weinand, chief investment officer at Regan Capital in a statement.
This earnings season exemplifies that growing divide.
McDonald's (MCD) reported that people of all income levels are seeking value. Starbucks (SBUX) said that customers are becoming more particular about where they spend their money. Mondelez (MDLZ) executives discussed an increase in price sensitivity in their earnings call.
A recent survey by Santander Bank of its customers found that while inflation fears have largely subsided, middle-income Americans are pessimistic about the economy. About 60% believe the US will enter a recession in the next 12 months, and 62% are making significant cuts to their household spending, the bank found.
"It's well known that the lowest income consumer is really struggling with inflation, but from a purely economic standpoint, it is the higher quintiles of earners that do the most spending," Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, told my colleague Bryan Mena.
Why it matters: There are many shapes to a recession.
Some economists have speculated that the US has been in a so-called "rolling recession" where only certain sectors of the economy are impacted. But there are also recessions that mostly hurt lower-income Americans.
A K-shaped recession is what happens when separate communities are hit by and recover from economic downturns at varying rates.
Some parts of society may experience renewed growth while others continue to lag behind. While the recovery from the 2020 recession can be described as V-shaped, many point out that it was actually two-pronged. Low-income Black and Hispanic families saw the fastest depletion of their savings during the pandemic, for example.
Many who worked in white-collar jobs recovered quickly as the government handed out stimulus payments and as stocks and home prices appreciated. Those without savings and who worked service jobs continued to suffer. Employees receiving the lowest wages were the most likely to lose their jobs in nearly every sector of the economy between 2020 and 2021, according to data from the Bureau of Labor Statistics.
Those Americans could still be suffering, but their stories are obscured by data that paints a broad picture of a resilient economy.
What's next: That bifurcated economy, wrote Daco, will lead some businesses to succeed while others struggle. It "will also lead to conflicting inflation signals with some sectors experiencing outright deflation and others experiencing persistently elevated inflation," he said.
That could make it a lot more difficult for Federal Reserve officials to decide whether to lower interest rates or keep them steady during their next few policy meetings. There's a danger that if monetary policy is too strict, it could quickly make financial conditions tougher, said Daco.
"This, along with growing concerns about the country's financial direction, might cause businesses and consumers to pull back on spending and investment," he said.
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