Falling stocks shake confidence among high-income Americans

“The instability of the market has rattled both the payer and the earner,” said Kevin Madden, executive vice president of advocacy at Arnold Ventures and a seasoned Republican strategist.

With the meeting of Federal Reserve policymakers this week, that mood is set to darken even further as the central bank continues its campaign of aggressive interest rate hikes designed to fight inflation by raising the costs of financing. borrowing and slowing economic growth.

Joanne Hsu, director of the influential University of Michigan consumer survey, which hit record highs last week, said there had been a precipitous drop in sentiment among the top third of workers. Generally, people who make more money feel better about the economy. But in the first half of the year, sentiments across income groups converged as stock prices began to experience steep declines – shrinking financial buffers for the wealthiest Americans.

According to data from the Federal Reserve, some 90% of the value of stocks held by households is held by the richest 10% of Americans.

“It is fundamentally impossible to ignore” that inflation has widened to all sectors, Hsu said. “We had strong stock market performance until the start of this year.” The S&P 500 is down more than 20% this year.

Inflation has also led to lower incomes for many people in the higher income brackets. Some low-wage workers as a group have seen their take-home pay rise as employers face fierce competition for labor in sectors such as retail and hospitality, but surges in prices disproportionately hurt low-income people whose spending is less discretionary.

The result: No one feels good about the current situation, even though the unemployment rate is near modern-era lows at 3.6% and many people continue to spend big.

“No one is going to say it’s a good economy” when inflation is high, said Claudia Sahm, a senior fellow at the Jain Family Institute and a former Federal Reserve economist.

High-income earners have weathered the worst economic impact of the pandemic much better than those earning less; nearly 40% of workers in households earning less than $40,000 lost their jobs in March 2020. The wealthiest Americans took advantage of a booming stock market and saw their savings balances increase by more than $40,000. a third below pre-pandemic levels, according to data from the JPMorgan Chase Institute.

“High-income consumers didn’t experience a pandemic recession the way low-income consumers did,” Hsu said.

But the tide of sentiment started to turn last summer when inflation picked up. A poll this month from Global Strategy Group found that among voters earning an annual salary between $100,000 and $400,000, the number who described the economy as doing well has halved since September. A major culprit? Market turmoil.

According to the poll, wealthier voters were much more likely to cite stocks as the best way to judge the state of the economy than those who earn less. Forty-five percent of those earning more than $400,000 a year cited the market as a major indicator; 22% of those earning less than $30,000 a year said the same.

“A lot of investments were made on the assumption that inflation would be low and interest rates would be low for a long time. [time]said Kairong Xiao, a professor at Columbia Business School. “Unfortunately, we now know that will not be the case. Inflation is approaching double digits and the Fed really needs to tighten monetary policy quite aggressively.

For some segments of the labor market, the low unemployment rate is helping weather the inflationary storm. The Atlanta Fed found that the median hourly earnings of job changers rose 6% from a year ago in May, 1 percentage point higher than the overall average.

“When people feel really, really stuck in all the other markets, [the] labor market is the only market where the odds are in their favour. And that’s the market they kind of rely on to solve all their other problems,” said Julia Pollak, chief economist at ZipRecruiter.

But much of that growth is concentrated in lower-income industries, meaning higher-income workers are less likely to be able to count on booming paychecks to counter the pain of higher price tags.

According to the Atlanta Fed, those in the bottom quarter of average earners saw their pay rise 6.7% year over year in May. Those in the highest quartile of average earners saw their income increase by about half, or 3.6%.

“If inflation helps keep the labor market tight and the tight labor market helps push wages to rock bottom, low-income people might fare better,” said Marc Goldwein, vice president senior and senior policy director. to the Committee for a Responsible Federal Budget.

Yet, he said, “high inflation…isn’t good for anyone.”

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