America's 'mass affluence' is bigger than you think

LONDON, - Few people doubt the existence of a K-shaped economy in the United States, where high income earners and asset owners are booming while those further down the wealth scale are struggling. But it's a misconception that this refers to a small wealthy elite versus everyone.

It is the sheer scale of that rich cohort that has been setting America apart from the rest of the world over the past decade. The debate about the differing fortunes of America's economic strata has been a recurring feature of the country's 250-year history. But the argument has intensified since the pandemic, and numerous recent studies from the Federal Reserve and private economists detail how it's played out in recent years. Indeed, New York Fed papers published as recently as May underscore the thesis. They show that since the start of 2023, U.S. spending growth has indeed been K-shaped, though this was most exaggerated in 2023 itself during a period of peak interest rates and the start of ‌the AI stock boom. This ⁠was quite distinct from ⁠both the pandemic period and the immediate pre-COVID years. The two main drivers cited were that poorer households were hit much harder from high inflation and elevated interest rates than wealthier groups, who also got a disproportionate tailwind from rapidly rising asset values. Whatever the fairness of that, it explains a lot of the aggregate U.S. economic resilience seen in the face of serial political and economic shocks, mainly because richer households do the lion's share of consumer spending and consumer spending represents the lion's share of GDP. As long as voters don't demand urgent redress and there's no major asset market meltdown, a positive feedback loop could well continue for years: rising overall spending and GDP growth spur higher U.S. profit growth, stocks rise further and this encourages consumer spending to continue. The power of this feedback loop might be greater than many assume. Carlyle's research chief Jason Thomas this week highlighted just how widely spread that spending power and relative wealth have become in the United States. He makes the point that wealthy Americans are no longer a small economic cabal but rather represent tens of millions of households who now pack an enormous economic punch. They appear to be riding out each economic ⁠shock with impressive ‌heft, helping to lift the broader economy. Those visiting America for this summer's World Cup, he reckoned, would have been struck by this "mass affluence" as much as they would the plentiful signs of K-shaped fortunes within the country. Digging into the data, Thomas looked at how spending on luxury goods as well as high-end travel, fine dining and live events over the past three years massively outweighed weak consumption trends among lower ⁠income cohorts, who suffered disproportionate financial stress. A similar pattern has emerged again since the Iran war this February, with spending among the top third of the pile growing 2.5 times the rate of that implied by other cohorts in this period.

A 45 million household elite?

But Thomas says the wider trend here is less about high income than it is ample financial resources and assets - and this expands the grouping of financially resilient Americans even more. Of the 135 million households in the United States, more than 50 million own a mortgaged home that has, on average, risen 50% in value since 2020, and 96% of those mortgages have relatively low long-term fixed rates, the Carlyle strategist said. And the gap between current mortgage rates of 6.55% and the average rate on total outstanding stock at 4.28% indicates a freeing up of some $300 billion more in disposable income for Americans than if their mortgages were reset variably or more frequently, as is typical in European economies. What's more, about 73 million U.S. households have retirement accounts, mostly 401k plans, and most of these are dominated by equity holdings. And balances in these defined contribution pension funds have risen by about $6.7 trillion since 2020, representing a compound annual rate of 12.7%. These brimming portfolios partly explain why U.S. ‌savings rates from disposable income have declined over this period. Thomas then crunches the numbers to estimate the number of U.S. households who have exposure to both housing wealth and stock savings. He reckons it's about 45 million, or a third of the total, and they collectively account for nearly $15 trillion of annual spending. That's three times the GDP of Germany and 70% of China's.


"The situation in the US is far from anyone's egalitarian ideal. The cost-of-living shock squeezed the finances of millions of ⁠households and the hoped-for catch-up in real incomes has been imperilled by recent hostilities," he concluded. "But rather than a 'K-shape,' the US economy could best be analogized to one travelling at two speeds: one at roughly the same rate as Europe's and another that's racing far ahead." The durability of all this is the perennial question. Additionally, there may even be a K-shape within the upper arm of the K as the super-rich billionaire grouping expands. But despite this year's energy squeeze and last year's tariff sweep, the overall U.S. financial picture looks remarkably healthy, as the artificial intelligence boom has propped up stock markets and recession fears have evaporated over the horizon. Of course, gnawing concerns remain about the potential for a pernicious bout of "stagflation" that eats into less wealthy families' budgets while draining asset markets over time for the richest third.

As the New York Fed economists concluded, "The substantial role played by financial assets raises questions regarding the potential vulnerability of retail spending to a financial market correction." But a correction, or at least one that endures for a long time, has proven elusive in recent years as Americans have withstood so many shocks. It's hard to see what causes one other than overconfidence.

(The opinions expressed here are those of Mike Dolan, a columnist for Reuters.)