A Tale of Two Cities

Posted in: Economics, General, Stock Market, Thought of the Week

Consumers are currently living a “Tale of Two Cities” where the high earners and the low earners are being impacted quite differently from the current economic climate. The confidence level of both matters to our economic well-being, and understanding where each stands can offer insight in where to invest for the future. Currently, consumer spending represents about 70% of our Gross Domestic Product (GDP) so the health and confidence of consumers is vital to economic growth.

There are a number of “headwinds” that both high earners and low earners will face in the near future including: high unemployment rate, increased payroll taxes, increased student debt, higher cost of living, and increased healthcare costs due to Obamacare. Although these headwinds will reduce the discretionary income of all consumers, the low earners will feel greater impact as these headwinds represent a greater percentage of their overall monthly earnings.

There will also be several “tailwinds”, or forces that promote stronger spending, including: low unemployment rate for those consumers with a Bachelor’s degree, wage growth  for the upper and middle income earners, investment portfolios and home equity values have recovered from the lows of 2008, and lower gasoline prices. Whereas the headwinds affected low earners more than the high earners, these tailwinds tend to favor high earners more than low earners. As a result, our Investment Committee expects to see stronger consumer confidence for high earners versus low earners. Stronger confidence typically translates to more discretionary spending.

Although high earners represent a very small percentage of overall consumers, they contribute the most to overall spending on an absolute basis. Therefore, watching high earner confidence spending levels is a strong indicator to the direction of overall consumer spending. As long as high earners continue to remain confident, our Investment Committee will also remain bullish on the positive momentum of overall consumer spending.

Read this week’s Thought of the Week to learn about how consumer spending drives our economy.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.