US consumer optimism (finally) moves the dial on spending habits but high earners are an outlier to this shift

Last month, Tearsheet reported how small businesses (SMBs) are pressing on in the face of various challenges while maintaining their optimistic outlook on the economy. This sentiment isn’t exclusive to SMBs but also reverberates among consumers, reflecting a shared sense of hopefulness.

In January, consumer confidence reached its highest level in five months, followed by a two-year peak in February. What’s driving this recent surge? Experts point to several factors, such as ongoing wage increases, reduced unemployment, and a moderation in inflation in comparison to the last couple of years. Moreover, the recovery of the stock market is also believed to have played a role in this shift.

With macroeconomic conditions showing signs of improvement, consumers are re-evaluating and adjusting their spending habits following a challenging period, a trend observed in a recent survey conducted by McKinsey. This doesn’t imply consumers have ceased spending or shopping altogether, however, they are taking a more mindful approach to their priorities and purchases.

February saw the practice of adjusting purchases for better pricing and value among consumers, although there was a slight dip in the number of people opting for more affordable options and switching to lower-priced retailers and brands compared to the end of 2023. However, the usage of Buy Now, Pay Later services leveled off in February, with 16% of consumers opting out of using the installment loan option over the past three months.

Younger consumers are more likely to downgrade their purchases than older demographics, and individuals with lower and middle incomes exhibit a greater tendency for this behavior compared to those with higher incomes. That said, higher-income consumers earning more than $100,000 are grappling with their own set of financial challenges with almost half (48%) of them living paycheck-to-paycheck as of January, according to a new report by PYMNTS.

High earners face financial constraints akin to those of lower earners, however, their nature of expenses varies. Besides living costs, this consumer group is feeling the heat largely due to higher fixed expenses such as student debt repayments or housing costs, particularly noticeable among Millennials. The report also underscores the sporadic saving habits among this demographic, often marked by occasional splurges and a lack of consistent financial management.

Approximately 22% of high-income consumers cite family expenses as their top reason for living paycheck to paycheck, followed by 15% attributing their struggle to managing non-essential spending to maintain their lifestyles and adhering to their budgets. With inflationary pressures on the mend compared to previous years, this segment of consumers is among the first to increase their discretionary spending, according to the report. 

Another explanation for upper-income earners exceeding their budgets is a tendency to take on additional fixed expenses. Individuals at the upper end of the income spectrum are more inclined to invest in assets beyond their primary homes, for instance.

Additionally, money tends to play a role in mindset. This demographic is likely less motivated to prioritize saving and building a financial cushion for unforeseen circumstances. Many approach their finances with a mindset of abundance rather than scarcity, focusing on their current resources instead of potential shortages. This perspective is reinforced by their confidence in stable income and higher earning potential, resulting in increased outlays and diminished opportunities for savings.

Although positive sentiments about the economy are driven by progress in controlling inflation, January’s inflation rate stands at 3.1%, exceeding the Federal Reserve’s target of 2%. It’s plausible that the Fed may delay implementing rate cuts until later in the year rather than in March. However, specifics regarding the timing of this adjustment are currently unknown. The higher-for-longer rates can in turn dampen spending, thereby impacting consumer sentiment in the weeks ahead.