Better-off Americans cut back on spending which could foretell bad news

There are several big questions concerning the US economy including the impact of potential tariffs, what the Fed will do with interest rates, and whether inflation could soar again.

With economic uncertainty comes caution and it seems that better-off Americans are being more careful with their spending while they wait to see a clearer picture of how the economy may fare in 2025 – and how their investment portfolios may perform.

The latest Bain & Company/Dynata Consumer Health Indexes reveal a significant drop in spending intentions among upper-income earners for January following a smaller decrease in December.

Given that investment portfolios are the primary asset for the cohort covered by the index, the decrease of 10.8 points to 96.5 (from 107.3 in December when there was a 3.2-point decline from November) is reflective of the downturn in the S&P 500 seen last month (down 3.5%) following a 28% gain for the equities index in the first eleven months of 2024.

“We think this trend is linked to December’s pull-back in the equity markets hitting these earners’ portfolios, commented Brian Stobie, senior director Bain & Company’s Macro Trends Group.

It’s notable that the broader barometer that the indexes provide – down 2.6 points in January and 3 points in December - does not show such a sharp drop among other income groups.

While the report notes that upper-income earners spending intentions may recover in February, as they did last year following a large January drop, it also notes that the average for the whole of 2024 was below average.

“Given that upper-income earners represent the majority of discretionary spending in the US, and that American consumers play a critical and outsized role in global demand generation, this is a worrying indicator early in 2025,” said Stobie, adding that this could have a negative impact on consumer-facing businesses during the uncertainty of the months ahead.