The US really is two economies in one
I recently read that in the US, the top 20% of households by income account for more than half the consumer spending. Of course, I had to check it out, and it turns out it isn’t quite that bad. It’s the top 30% of households by income that account for 51% of spending. The data is from the US Consumer Expenditures Survey, so I don’t have comparable data from other countries, but since income inequality in the US is higher than in the UK or Europe, I would assume it is less extreme in those countries than in the US.
Consumer expenditure by household income decile
Source: US Bureau of Labor Statistics
However, where things get interesting is when you combine this data with the impact of the US tax cuts and the US budget, as well as the tariffs introduced this year. The chart below is from the Yale Budget Lab and shows their estimates of how the US budget and tariffs will change income before taxes.
Distributional impact of the budget and tariffs
Source: Yale Budget Lab
I recently wrote a post on why the US seemingly didn’t drop into recession in 2022 and why I think it won’t officially fall into recession in 2026 or 2027. The key is that the US is effectively two economies in one. On the one hand, there is the economy of the top 20% or so, which is doing great and gets a boost from lower taxes. And then there is the rest of the economy, which is effectively in recession and gets hammered by higher tariffs.
Yet, official statistics will likely show a much smaller drop in consumer spending than what people really experience. The chart below shows the unweighted average drop in pre-tax income from tariffs and the US budget. This is how it will feel to people living in the US.
But what will show up in the official GDP and retail sales statistics is the change in consumption weighted by how much different income groups spend. And while the unweighted average is a drop in expenditure of 1.4%, the weighted expenditure drop is just a third as large at 0.5%. So, the US statistics will look just fine, but the people will not feel fine at all.
What it feels like vs. what it looks like
Source: Panmure Liberum
Good article. What's interesting is that for the first time since the 2008 GFC, the US is seeing a huge gap between consumer & business spending. Put simply, GDP looks fine (consumer spending) but Gross Output does not (business spending). The trade war is impacting businesses, so how long before we see further employment cuts & a hit to consumption?
This article explains it well: https://navellier.com/10-7-25-low-gross-output-implies-that-gdp-may-over-estimate-growth/
This seems really bad news for increased populism if the have nots keep losing ground to the have mores. Ben Franklin once remarked Democracy is a good thing, if done wisely. He knew if done unwisely it could end up in what we're seeing today. Marx issued a warning to the capital owning class about what could happen if you keep screwing the working poor; Marx's predictions were wrong but his warning seems timely. How long can this inequality and screwing the working poor for nothing more than spite continue? The words 'roost' and 'chickens' come to mind. The Dems gave up on the working poor a long time ago during B. Clinton so it's not a party political point. Maybe another Depression will help us Americans remember what we know but have forgotten.