So Go the Top Earners, So Goes the Economy?

In what most analysts think is a fleeting blip, US consumer spending cooled in January. Yet some worry a longer-running trend suggests consumption is skating on thin ice: Higher earners account for their largest-ever share of spending, allegedly hiding broader economic weakness. Let us explore why we think this claim is beside the point for markets.

Real (i.e., inflation-adjusted) consumer spending fell -0.5% m/m, its first decline in 12 months and steeper than Bloomberg estimates of -0.1%.^[i] Most economists blamed the dip on extreme winter weather and natural disasters (e.g., California’s wildfires), while tariff worries may have also pulled some January spending into December, leaving a pothole thereafter. Under the hood, most goods categories were in the red, with motor vehicles & parts (-6.0% m/m) falling most.^[ii] Clothing & footwear (0.3% m/m) headlined a handful of growthy goods categories, perhaps reflecting the need to bundle up in a chilly January.^[iii] Services spending (0.1% m/m) inched up as household utilities (2.8% m/m) led the way—also likely due to weather-driven heating demand.^[iv] These findings echo January’s retail sales report, and most expect spending will rebound as one-off distortions pass.

But some warn another risk looms: So go top earners, so goes the economy. According to a recent Moody’s Analytics analysis, the top 10% of US earners (households making around $250,000 or more annually) account for about half of consumer spending—a record high for the 35 years of data they analyzed.^[v] Some think the economy depends largely on these well-off households. Things may be fine now because wealthy consumers feel confident thanks to rising stock prices and home values. But if that confidence falls, trouble isn’t far behind.

Yet this record high isn’t a shock or threat when placed in context. The top earners have contributed the largest portion of spending since Q4 1995, and that share has climbed irregularly over the past 30 years.^[vi] Since 2020, the gap between the top 10% and the next income bracket (60% - 90%) has mostly widened, eclipsing the prior high (48.3% in Q1 2017) in Q1 last year.^[vii]

Exhibit 1: Share of US Personal Spending by Income Bracket Q4 1995

Source: “Rich People Are Firing a Cash Cannon at the US Economy—But at What Cost?” Amanda Mull, Bloomberg, 2/28/2025. Q3 2024 are the latest data available. We included Q4 2019 to show income brackets’ prepandemic share of US spending.

What is behind the recent enlarging gap between high-income households and the rest? Not feelings, confidence or other squishy concepts. The “wealth effect” has always been fiction, in our view. Consumer spending rides with disposable income growth, not stock prices. Which means the real culprit here is likely inflation. As a recent Wall Street Journal analysis pointed out, the bottom 80% of earners spent 25% more than they did four years earlier, barely outpacing the price increases of 21% over the same period. The top 10% spent 58% more.^[viii]

The Minneapolis Fed researched this issue last year and found the 2021 – 2022 surge in inflation disproportionately knocked middle- and lower-income households.^[ix] For instance, middle-income households devote a larger share of their budgets to transportation. Surging prices in new and used cars as well as gasoline (due to microchip shortages, supply chain issues and the war in Ukraine) hit this income bracket hard.^[x] For lower earners, housing comprises a larger share of expenses—so rising rents and home prices weighed heavily.^[xi] In contrast, high-income households navigated this elevated inflation environment far better, leaving them with more disposable income to allocate to discretionary spending. And wages at the low end of the spectrum—as well as fixed incomes (e.g., Social Security)—were the slowest to start catching up with higher prices.

We feel for those pressured by these broader economic trends. That pain and stress are no doubt real. In September 2022—a few months after CPI’s June high—the Census Bureau’s Household Pulse survey reported 64% of low-income respondents found inflation “very stressful.”^[xii] In comparison, 17% of the highest-earning bracket were highly stressed (and 21% weren’t stressed at all).^[xiii]

But stocks are cold-hearted and recognize economic hardships for certain income brackets don’t automatically spell broader economic trouble. Consider how personal consumption expenditures (PCE), which comprise about two-thirds of economic output, have steadily grown despite the many challenges facing middle- or low-income households over the past several years. (Exhibit 2)

Exhibit 2: US Real PCE, December 2019 – January 2025

Source: FactSet, as of 3/4/2025. Real PCE, December 2019 – January 2025.

As for worries the economy’s fate rests with top-income households, discretionary consumption doesn’t fall for no reason. Consumer spending is generally stable since folks buy essentials (e.g., housing, medicine, utilities) regardless of the economic environment. If they need to tighten the purse strings, discretionary purchases are the first to go—which means these cutbacks are usually a response to tough times, not a cause. Cyclical shifts usually hinge on other, more volatile economic categories like business investment.

Top-income households’ habits get headlines, and we don’t dismiss the sociological implications of a gap between the top earners and the rest. But these issues don’t necessarily weigh on future earnings—which is what markets care about most, in our view.