Underneath Strong Topline Retail Growth, Low Earners’ Struggles Make a Case for More Rate Cuts

The September retail report from the Census Bureau last week provided a reassuring sign of resilient consumer demand, with nominal sales increasing a larger-than-expected 0.4% month over month. Morning Consult’s spending data, derived from a survey asking consumers how much they spent on various categories in the past month, showed a similar bump in both overall spending and retail-specific categories. However, beneath these rosy topline numbers there continues to be a discrepancy in consumers’ spending experience in recent months, with higher-earning households propping up spending while lower earners pull back. 

Retail sales growth remains driven by higher earners

Since 2022, the year in which inflation soared to its recent peak of 9.1% in June, a gap in spending trajectories has opened up between higher and lower earning households. For retail sales, several trends have had a major impact on sales levels since 2022, including the unwinding of pandemic-related supply chain disruptions, cooling goods demand as consumers prioritized services, and price sensitivity amid elevated inflation and living costs. This latter dynamic remains prevalent today, continuing to impact purchasing patterns among consumers in 2024.

However, as inflation slows, Morning Consult spending data suggests it is lower income adults who remain the most inclined to cut back. From January 2022 to September 2024, real seasonally-adjusted retail spending fell 22.7% on average for adults from households earning less than $50,000 per year. Meanwhile, higher earners maintained relatively flat inflation-adjusted retail spending levels in recent years. 

Auto spending patterns have been a major differentiator between high- and low-income households

While the highest earners have had the largest increases in retail purchases overall over the past year, spending on auto payments among this group has been notably stronger than for lower earners. Real average spending on this category for the three months ending in September 2024 was 18.2% higher for high-income adults compared with the same period a year prior. For the lowest earning group, spending on auto payments fell 11.5% during this time–a net difference of nearly 30 percentage points between the two groups’ spending trajectories.

The slowdown in monthly auto spending among both low- and middle-income adults is likely reflective in part of slower purchasing demand. Morning Consult’s data tracks payments from a consumer perspective rather than sales volume, so a new car purchase that relies on financing will show up in the spending data as an increase in monthly car payment amounts over the duration of the loan, whereas the government retail sales report will more likely capture the purchase from the seller perspective as a one-time lump sum. 

Auto sales growth has been trending steadily lower according to WARDS auto data, which showed a 0.8% annual decline in the three-month average number of North American light vehicle sales in September–the first negative reading in two years. Slower auto sales numbers may contribute to softer spending growth in Morning Consult’s data going forward. For example, fewer car owners overall or simply a higher share of long-term owners with fully paid-off loans would result in a higher share of Morning Consult’s sample not making any auto payments, decreasing average spending.

Consumer health scores offer insights on how household finances impact car buying and vice versa

Conventional wisdom dictates that consumers are more likely to invest in large purchases like autos when they are feeling confident about the economy and their own financial situations. Morning Consult’s Consumer Health Index (CHI)–a metric combining employment data and sentiment about personal finances to gauge consumer demand and spending growth–supports this notion: Adults who said they purchased a new or used car within the past year have generally been associated with higher CHI scores compared with U.S. adults overall.

A similar pattern has held among high- and middle-income adults since tracking began in 2022, with CHI scores consistently more elevated among car buyers within each income group compared with their peers who did not buy cars.

The pattern for CHI scores among adults earning less than $50,000 annually who did or did not buy cars is slightly different. Through early 2024, car-buyers within this income cohort registered a widening advantage over non-buyers in terms of CHI scores. Since we know from our spending data that this group’s overall outlays on auto payments was muted during this time period, it is likely that only the most financially optimistic sliver of this cohort was making auto purchases. 

Since March of this year, however, low-income recent car-buyers’ consumer health scores have plummeted, falling below their non-purchasing peers in September through the first few weeks of October. This may be a sign that some buyers bit off more than they could chew, as auto loan delinquencies rise and Morning Consult’s data shows a rising share of low earners report a lack of confidence in their ability to afford their monthly car payments.

Lower earning adults’ declining consumer health and increased financial vulnerability with regard to affording debt repayments are potential signs of the impacts of still-elevated interest rates following several years of elevated inflation. While topline statistics like resilient spending growth and low unemployment convey a sturdier view of the status of the U.S. economy, Morning Consult’s data shows that the consumer experience varies greatly depending on financial circumstances. Ahead of the Federal Reserve’s November meeting to determine the next steps for interest rates, it is clear that for lower income households, further cuts likely cannot come soon enough.