At American Express, consumers continue to open high-fee credit cards and purchase luxury goods such as travel. But for financial firm Upstart, microloans are attracting strong interest as cash-strapped Americans try to make ends meet.
This juxtaposition highlights the growing polarization between income classes in America. And since the end of the pandemic, the U.S. has experienced a “K”-shaped recovery, with higher-income groups reaping the greatest benefits and an increasingly widespread view that lower-income Americans will be held back or left behind. There is.
This could cause chaos in the U.S. economy and affect everything from how the Federal Reserve moves interest rates to who Americans vote for in November. On top of this, some worry that the amazingly resilient economy that has become a global wonder is under threat. And it comes at a unique time, when consumers, once opposed to relying on debt, are beginning to break away from it in large numbers.
“Our consumers are doing very well,” American Express Chief Financial Officer Christophe Le Caillec told CNBC last month, citing spending on airline tickets and dining out. “They're definitely enjoying life.”
The typical American Express consumer is wealthy and shows signs of persevering despite stubborn inflation and lingering economic uncertainty. In a recent quarter, more than 3 million new credit cards (which can carry annual fees of several hundred dollars) were issued. Overall cardholders in the U.S. grew 8% in the last three months.
Spending on American Express cards by airlines in the first quarter increased 9% from the previous quarter, confirming the continued willingness to pay for experiences. First class travel has performed particularly well, but management noted that this may be partially tied to a resurgence in business travel. This may also bode well for white-collar workers, as companies are showing a willingness to spend on travel again.
But the actions of some Upstart customers paint a different picture of the same economy. The company reported Tuesday that loan originations of up to $2,500 jumped 80% in the first quarter. Principal product manager Blair Lanier said these “relief loans,” as management calls them, have been used for expenses such as rent and other recurring bills.
Lanier said people who take out these loans are likely to be low-income earners with only a high school diploma or more. Upstart also made changes to its automatic approval process, the company said, as some people may turn to these smaller loans after being rejected by larger loans or other lenders. (This loan is a fixed amount product with a maximum annual interest rate of 36%.)
“The past two years have been a very unique, specific and unusual macroeconomic event,” Lanier said. “I'm not really surprised that there's a huge existing demand for a product like this, and that that demand is about to become apparent right now.”
Lower class struggling
Americans who rely on Upstart's microloans are struggling with increasing financial pressures.
The end of COVID-19-era fiscal stimulus and the resumption of student loan payments have depleted savings accumulated during the early days of the pandemic. Rising gas prices can be especially painful for those without remote work privileges. On the other hand, higher-income consumers may also feel encouraged by rising home prices and strength in the stock market.
Low-income households make up a large portion of the country's population, which may help explain the widespread economic downturn. The University of Michigan Consumer Confidence Index fell more than 12% from April to May alone as consumer expectations for future inflation rose, according to data released Friday. Although the index was well below economists' expectations, it was still well above the same period last year.
Some economists were at a loss to explain the closely watched change in research, which came at a time when many expected money to run dry. Americans' excess savings peaked at more than $2 trillion in August 2021, according to data analyzed by the San Francisco Fed. However, as fiscal burdens increased, that increase completely dried up over the next few years, and as of March, U.S. households were saddled with a cumulative total of $72 billion in debt.
At the same time, the costs of various goods and services are also rising. Although the pace of inflation has slowed from the multi-decade highs seen in recent years, prices continue to rise faster than monetary policymakers believe is healthy for the economy.
Given these factors, economists are perplexed by the persistence of spending trends. But the long-awaited consumer downturn is finally showing up for many household brands, especially those frequented by lower-income consumers.
McDonald's says the company is adopting a “street fight mentality” and is “radically focused” on value after soaring prices have decimated customers and driven them away. said. PepsiCo, the soda and snack maker, acknowledged that low-income Americans are “reaching their limits.”
Tyson Foods frozen chicken products.
Daniel Acker | Bloomberg | Getty Images
Frozen food maker Tyson Foods is seeing consumers shift to eating at home rather than at its quick-service restaurants. Management says people, especially those in lower tax brackets, are switching to Tyson's well-known private label brands when shopping for groceries.
This is part of a trend known as “price cutting” and could be a sign that consumers are tightening their wallets. Market data provider Adobe Analytics has seen such behavior online over the past four months across numerous categories, including personal care, electronics, apparel, furniture, and groceries.
Furniture e-commerce platform Wayfair said sales of big-ticket items were particularly weak. Tool maker Stanley Black & Decker lamented sluggish consumption and his focus on do-it-yourself projects.
Despite heightened uncertainty elsewhere, this consumer group points to a hot labor market and rising wages as sources of optimism. But last month's surprisingly weak jobs report and recent spike in jobless claims could throw a damper on one of the last reasons why low-income Americans are happy with the economy.
“Low-income consumers are becoming more cautious,” Citigroup CEO Jane Fraser told CNBC's Sarah Eisen this week. “They are feeling the added pressure of higher and rising costs of living, so while they have jobs, their debt service levels are higher than before.”
Fraser is one of several business leaders and economists to point to the “K” shape of consumer habits. In this environment, the upper class continues to spend, while those less well off suffer from rising price tags and interest rates.
In other words, middle- and high-income consumers are “optimistic,” but lower-income consumer confidence is in “recession territory,” according to Piper Sandler Chief Global Economist Nancy Lazare. It is said that there is. He said the discrepancy could dash hopes for a “soft landing” – the goal of containing inflation without sending the economy into a prolonged contraction.
Tyler Schipper, an associate professor of economics at the University of St. Thomas in Minnesota, said it's also important to remember that low-income Americans were feeling financial pressures even before the pandemic. He said the group had built its position amid labor shortages, but it made sense to return to more difficult conditions as the economy continues to loosen from the shock of 2020.
“They started out struggling,” Schipper said. “I think the idea that low-income workers are going to seek the best price is, in some ways, a return to normalcy.”
Schipper said evidence of price matching or weaker trading could be good news for the Fed, which is looking for signs that previous rate hikes have had the intended economic tightening effect.
the upper class hums
Although a smaller segment of the population, high-income earners are still weeping, which could be a game-changer for some companies.
Airlines have been racing for years to expand business class and premium economy cabins and expand lounges to accommodate big spenders. Delta Air Lines announced that sales of these cabins exceeded those of economy class. New York-based JetBlue Airways, which is much smaller than its major airline competitors, announced this week that it would cut some flights and replace it with more business-class seats on its Caribbean routes.
Booking Holdings said customers are not sacrificing highly rated hotels or extended vacations. Airbnb advertised interest in travel to events such as the Paris Olympics and this summer's European Cup in Germany.
Airbnb management emphasized customers' hunger for experiences. Similarly, Ticketmaster's parent company Live Nation said it sees “no weakness” in demand.
Theme park chains Six Flags and Cedar Fair both had better-than-expected attendance numbers in their most recent quarters. Six Flags announced that the number of 2024 season passes sold through April increased at a double-digit pace compared to the same period last year.
Guests ride a roller coaster at Six Flags Magic Mountain Theme Park on Saturday, November 4, 2023 in Valencia, California, USA.
Eric Thayer | Bloomberg | Getty Images
Unlike Wayfair, Garmin is more focused on selling more expensive products. The company pointed to the fact that its fitness division's revenue increased 40% from the same quarter in 2023, driven by wearable technology.
“We've actually had a very strong response to some of our high-end products,” Garmin CEO Cliff Pemble told analysts earlier this month. “People are buying based on their needs, and I haven't seen much evidence of mixdowns that I can confidently point to.”
Where are the weaknesses?
This divergence also occurs within sectors. Look no further than Planet Fitness and Life Time.
Planet Fitness, known for memberships starting at $10, predicts that “consumer interest will shift” toward saving money by 2024. At upscale gym chain Lifetime, demand for personal training has reached record levels, with clubs waiting in line.
“Personally, I expected to see some weakness over the last 18 months, and I was wrong,” Lifetime CEO Bahram Akhradi told analysts this month. Ta.
— CNBC's Kate Rooney, Amelia Lucas, Brandon Gomez, Robert Hamm, Jeff Cox, Leslie Josephs and Hugh Song contributed to this report.
