After a period of angst, Americans appear to be feeling a bit better about the economy.
What's happening: The Conference Board's consumer confidence index for August, scheduled for release later today, is expected to increase by 1.8 points to 97.5, according to Goldman Sachs analysts. That comes after three consecutive months of declines.
Meanwhile, the final results of the University of Michigan's consumer sentiment survey this month showed a big surge in the outlook for the year ahead.
That might sound like great news. But a closer look at the numbers shows a more concerning picture. The problem is that wealthy Americans aren't as jazzed, and that could signal more pain ahead for markets and the economy at large.
"High income consumers, who generate a disproportionate share of spending, registered large declines in both their current personal finances as well as buying conditions for durables," Michigan researchers wrote.
Why it matters: Spending from the top 20% of earners made up nearly 40% of total consumer spending in the United States in 2020, according to data from the Bureau of Labor Statistics. And consumer spending is the most important driver of US economic growth.
Of course, there can be a difference between how people say they feel and what they actually do. But in this case, we're starting to see some real impact.
Analysts at the Bank of America Institute found that total credit card spending per household (excluding grocery, gas and clothing) for consumers making more than $125,000 has contracted for three consecutive months while remaining fairly resilient for the lower-income consumer.
There are other signs that the rich are trading down. Walmart CFO John David Rainey told CNBC earlier this month that buyers were purchasing fewer high-margin discretionary items like clothing because inflation was making them shell out more for necessities. He also, interestingly, noted that about three-quarters of Walmart's second quarter market share gains in food came from customers with annual household incomes of $100,000 or more.
High-income diners are also reportedly swapping pricier restaurants for budget-friendly standards like Applebee's and IHOP.
Sales at the two chains, which are both owned by Dine Brands, grew about 6% to 8% among households earning over $75,000 per year in the second quarter, according to Dine CEO John Peyton. The bump "suggests to us that guests that often dine at more expensive restaurants are finding Applebee's and IHOP because of their well-known value position," Peyton said during a call with analysts earlier in the month.
That might sound positive for companies that are well-positioned to benefit from such shifts in habits. The problem is that sentiment among lower-income consumers typically lags higher-income sentiment, which means a larger slowdown could be on its way.
"In an economy that's 60% driven by services, you can see how easily that outlook on spending in a narrow group of income earners has a bigger effect on a larger group of Americans," Marvin Loh, senior global macro strategist at State Street, told me. "This is the definition of trickle-down."
Investor insight: That doesn't bode well for stocks of companies that sell items people want but don't necessarily need. Amazon, Home Depot and LVMH helped rocket the consumer discretionary sector from its mid-June lows, rising nearly 30% through mid-August.
The sector dropped precipitously, however, after Federal Reserve Chair Jerome Powell indicated that there would be economic "pain" ahead as the US central bank continues to hike interest rates.
"The gains that we saw over the last six weeks didn't make a whole lot of sense to me," Loh said.
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