Recession Early Warning? Spending By the Wealthy Is Slowing

America’s economy is built on consumption. Average Americans have been pushing the US economy along, spending money they don’t have. But as we’ve reported, there are signals that the credit cards might be close to maxed out. Now there appears to be another warning sign – the wealthy are reining in their spending.

In August, Spencer Schiff wrote an article noting the importance of consumer spending to the US economy and the consequences that will follow if Americans suddenly tighten up their wallets. The mainstream has also taken notice. During a CNBC interview, economist Jim O’Neill said the US economy is becoming “riskily dependent” on the “overleveraged consumer.”

The economy’s strength … depends so much on consumption, which is fine unless financial conditions tighten unexpectedly when a lot of indebted US consumers won’t be able to afford to keep up the consumption their doing.”

Well, it looks like the rich are tightening their belts.

According to a report at Yahoo Finance, spending by the rich has slowed over the last year. This could be an early warning of a recession. Spending by the top 10% of households by income makes up nearly half of overall consumption in the US.

According to an analysis of Federal Reserve data by Moody’s Analytics, spending by the top 10% fell by 1% in the second quarter from the same period in 2018. And a four-quarter average of outlays by the high earners has slipped on an annual basis the past three quarters, marking the first such declines since the Great Recession of 2007-09, according to the Yahoo Finance report. Mark Zandi, chief economist at Moody’s Analytics, said this could be a big problem for the US economy.

High-income consumers have been the Atlas holding up the US and global economies. But they appear tired, and if they founder, so too will the economic expansion.”

Overall consumer spending is still increasing, but that pace has slowed as well. According to Yahoo Finance, household outlays increased 2.9% at an annual rate in the third quarter, down from a robust 4.6% early in the year.

CNBC noted the slowdown in spending by the wealthy a few months ago. Luxury real estate is having its worst year since the financial crisis. Sales at art auctions are down for the first time in years. Retailers that cater to the wealthy are also struggling. Tiffany’s revenue fell 4% in the Americas in the second quarter.  Barney’s filed for bankruptcy. And Nordstrom has posted three quarterly revenue declines.

According to CNBC,  “recent data suggest that the US wealthy are beginning to shut their wallets.” Meanwhile, “savings of the rich has also exploded, more than doubling over the past two years, suggesting that the wealthy are hoarding cash.”

There are a number of reasons that the wealthy have tightened their wallets, according to the Yahoo Finance report.

• Worry about the stock market. Although it has hit record highs in recent weeks, the broader market is only up 6.2% since September 2018 after the big drop last fall. Many fear the market is overvalued and primed for a crash.
• Home prices aren’t rising at the same rate they were. Prices of the top-third, most expensive homes rose just 3.1% in October from a year earlier. Inventories of luxury homes have increased and sales have tanked. This could be a sign housing bubble 2.0 has popped.
• Wage growth for the wealthy has stagnated.
• Trump’s tax cuts eliminated many deductions and increased the tax burden on many wealthy Americans.

There is also seems to be a general some economic unease among the rich and a sense that it’s time to tighten their belts.

It would make sense that a spending slowdown would start with the wealthy since they tend to be more attuned to what’s going on in the economy. They didn’t get rich by being dumb with their money. The fact that the rich have shifted from spending to saving could be a canary in the coal mine.