As the US Bureau of Labor Statistics prepares to release its Annual Consumer Expenditure Survey next week, the data is expected to confirm what many Americans are already experiencing: financial hardship. Over 50 per cent of US households are likely to have seen their after-tax income drop not only below 2022 levels but also below 2021 and 2020 levels. This decline comes after a period of pandemic stimulus subsidies, which artificially boosted incomes in previous years.

The struggling majority

For over half of US households, 2023 will mark the first year since the pandemic without any Covid stimulus subsidies. Pre-tax incomes for those earning under $70,000 annually saw little change in recent years. However, after-tax incomes increased significantly due to stimulus checks. With subsidies gone, a sharp drop in after-tax income is anticipated, highlighting the struggle many families now face. Despite this widespread financial strain, the US economy continues to show strength. This resilience is attributed to two key groups: high-income households and Gen Z & Millennials.

Companies like Dollar General and Dollar Tree have already noted a shift in consumer behavior, with customers increasingly "cash strapped" and opting for cheaper alternatives. The upcoming BLS survey is expected to show a sharp decline in after-tax income, particularly compared to 2021 when stimulus checks were still being distributed.

The spending power of the young and affluent

Despite the financial challenges faced by many Americans, the US economy remains surprisingly strong. This resilience can be attributed to two key groups: high-income households and young adults, particularly Gen Z and millennials.

High-income households, representing about 17.5 per cent of all US households, have largely been unaffected by the economic downturn. Their spending has remained relatively constant, even as they shift their focus from discretionary items to essentials.

Meanwhile, Gen Z and millennials, aged between 24 and 38, have emerged as a major force in the consumer market. This generation benefits from a unique form of subsidy: their parents. Many still live at home, remain on their parents' cell phone plans, and enjoy other forms of financial support. This gives them significant discretionary spending power, which they are using to drive growth in categories like French-press coffee, leisure experiences, online gaming, and sports betting.

A divided economic landscape

The BLS survey is likely to reveal a deeply divided US economy. For many households, the cost of living has risen significantly while incomes have stagnated or even declined. However, a smaller, more privileged group continues to enjoy a comfortable lifestyle and drive consumer spending.

As long as these trends continue, the US economy will likely remain a tale of two consumers. The spending power of young adults and high-income households will continue to prop up the economy, even as a growing number of Americans struggle to make ends meet.