Fed Finds High-End Spending Holding as Household Strain Deepens

The American consumer is still spending, but the Federal Reserve’s latest survey makes it increasingly difficult to speak of all consumers as though they were experiencing the same economy.

The Fed’s August Beige Book, based on information collected through Aug. 24, found that consumer spending grew slightly overall. The national result, however, joined two conditions that sit uneasily together: “heightened price sensitivity” and “solid high-end purchases.” The separation is showing up not only in what consumers buy, but in where they eat, where they stay, whether they postpone large purchases and, for some households in at least some regions surveyed by the central bank, how they’ve financed ordinary expenses.

Consumer spending in New York, for example, increased slightly, “buoyed by strength at the high end.” A retailer reported solid luxury sales, while growth in the mid-tier came from higher prices rather than greater sales volume. The pressure also reached purchases that households can defer. New vehicle sales in upstate New York remained weak amid affordability concerns, with some consumers repairing existing cars rather than replacing them. New York banks, meanwhile, reported that delinquencies had edged higher across most loan categories.

By way of contrast, Cleveland reported its fourth consecutive period of declining consumer spending, with retailers blaming higher food and fuel prices and economic uncertainty. Merchants expected consumers to continue limiting discretionary purchases.

Richmond saw overall consumer spending rise, but the composition was uneven. Smaller brick-and-mortar retailers reported negative to flat demand and slower traffic, while upscale Virginia hotels recorded double-digit revenue growth.

Savings Separate Households That Can Absorb Higher Costs

The Beige Book records what businesses, banks and community organizations are seeing. The latest PYMNTS Consumer Expectations Index helps identify the household finances underneath those purchasing decisions.

PYMNTS Intelligence found that 19% of households said their financial lifestyle had deteriorated during the previous 12 months, compared with 7.1% whose circumstances improved. Put differently, households were 2.7 times as likely to lose financial ground as to gain it. The share living paycheck to paycheck and struggling to pay bills rose to 27% from 18% over the year.

Savings provide an important dividing line.

Among households that had previously been living paycheck to paycheck without difficulty but subsequently fell into financial difficulty, 66% said they had exhausted their savings or had no savings during the preceding 90 days. Only 26% of households whose financial position deteriorated could cover more than three months of expenses from savings, compared with 46% of households whose position remained stable and 62% of those whose finances improved.

A consumer with liquid savings can absorb a higher grocery bill, an expensive car repair or a more costly flight without immediately changing other spending. A household without that reserve has fewer choices about where the adjustment occurs.

The Beige Book supplies evidence of that adjustment becoming more severe. Atlanta community organizations reported worsening financial strain among low- and moderate-income households and rising requests for assistance. Contacts said some families were relying on credit cards, payday loans and buy now, pay later services to cover essential expenses.

Minneapolis reported that the cost of living had become less affordable even for some higher-income workers, while lower-income workers struggled with everyday expenses and could find an unexpected car repair financially devastating.

The August Beige Book’s qualitative survey underscores the consumer bifurcation evident in earlier Fed reporting and in our own data. High-end demand remains capable of supporting aggregate spending even as another portion of the population trades down, postpones purchases, draws down savings or turns to credit.