Highest Earners Likely to Drive Consumption Surge, NY Fed Finds

Many of the consumption changes and declines seen during the pandemic can be attributed to lower spending by high-income individuals, who may play an outsize role in spending increases as they begin to travel and dine out again, New York Federal Reserve research showed.

Americans making more than $100,000 per year -- and especially those whose earnings exceed $200,000 annually -- accounted for much more of the change in spending in 2020 than their lower-income counterparts, New York Fed researchers David Dam, Davide Melcangi, Laura Pilossoph and Will Schirmer wrote in a Liberty Street Economics post published Thursday.

“Our findings suggest that these consumers may have strongly reduced consumption during the pandemic and will likely play a crucial role in unleashing pent-up demand when pandemic restrictions ease,” the authors wrote.

These individuals tend to spend more on discretionary items like recreational activities and hotels that weren’t widely available during pandemic lockdowns, and were less likely to lose employment in the past year. Lower-income individuals spend a greater portion on their income on necessary items like food at home and health care, things that can only be cut to a certain extent.

Highest Earners Likely to Drive Consumption Surge, NY Fed Finds

Some of these drivers are already apparent in spending data. Consumer prices rose in April by the most since 2009, driven in large part by categories such as motor-vehicle sales, airfare and hotels.

The economists found that airline spending was the most constrained by the pandemic, whereas purchases of furniture were among the least affected. High-income individuals’ exposure to pandemic-impacted expenditures was 33% higher than for the lowest-income Americans. They also make up a disproportionately larger share of overall consumption.

©2021 Bloomberg L.P.

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