America's middle class is feeling the heat from sky-high interest rates and persistent inflation.
Middle-class income growth has lagged behind that of the upper-class since 1970, according to a Pew Research Center report published May 31. The report defines middle-income households as having incomes that are two-thirds to twice that of the US median household income. The income figures are adjusted for household size.
Now, the cost-of-living crisis is exacerbating that squeeze.
"The economy is booming, and yet many Americans are still gasping for air financially. They simply don't have the breathing room to plan beyond their present needs," said Jennifer Jones Austin, co-chair of the National True Cost of Living Coalition, in a release.
There are signs that middle-class Americans are dialing back their spending. Fast food joints, a mainstay dining destination for middle-income consumers, are leaning into discounts to placate frustrated diners. That comes after restaurants raised their menu prices as inflation soared, betting that customers would still be willing to spend. But that wager soured as diners tightened their purse strings, leading to less foot traffic and lower sales for fast food chains.
Target, which has a core middle-class customer base, reported in May that sales at stores open for at least a year dropped 3.7% during its latest quarter from the prior year. That marked its fourth consecutive quarter of sales declines. Kohl's that same month reported weak first-quarter results, underlining how middle-income consumers are pulling back spending on non-essential clothing and discretionary merchandise at department stores.
"Our customers continue to be pressured by a number of economic factors, including high interest rates and inflation," Kohl's CEO Thomas Kingsbury said on a May 30 call with analysts. "Our middle-income customer continues to be impacted."
Economic data and corporate earnings reports have shown that lower-income consumers are struggling to pay their bills on time, reducing their spending and searching for deals. Wealthy Americans, who have helped support the economy's strength through high interest rates, are also starting to reel in their purchases.
There are other signals that many consumers are facing financial woes. US home prices are at record highs. Americans are racking up debt and running low on savings accumulated during the height of the Covid-19 pandemic. Thousands of corporate layoffs have some Americans struggling to make ends meet saying they feel as though they are living in a recession.
Americans have for months grappled with a divergence between the way they feel about the economy and how the economy looks on paper. But cooling economic data has begun to narrow that gap. US job growth slowed considerably in April, with just 175,000 positions added after a slew of piping hot jobs reports. Activity in the US manufacturing sector continued to contract in May. Data released Tuesday revealed that the number of US job openings shrank for the second straight month in April, setting a new three-year low.
Wall Street will get its next look at the state of the economy on Friday when the Bureau of Labor Statistics reports payroll figures for May.
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