The US economy runs on spendings of the 1% – but that clock may be ticking

The economy in the United States is getting squeezed by the very people who’ve been keeping it alive. On Monday, Bloomberg reported that rich Americans—who’ve been responsible for almost half of all consumer spending—are starting to tighten their wallets.

Their spending has carried the economy through pandemic shocks, rising interest rates, and inflation. But now, with stocks crashing and confidence fading, that lifeline is weakening fast.

Over the last month, trillions of dollars have been erased from U.S. stock markets. The S&P 500 dropped more than 10% from its recent peak, putting it in correction territory. It’s still down 8% from its February high.

This plunge followed growing concerns about President Donald Trump’s escalating trade war. The market chaos is making high-income earners nervous, and they’re starting to back off from the kind of spending that has kept the economy running.

Rich Americans rethink their spending as markets fall

David Lowell, a 66-year-old live-events producer from Roswell, Georgia, said on Monday that he spent $40,000 remodeling his kitchen back in October. Back then, markets were climbing, and his retirement savings looked solid. But things have changed.

His portfolio has dropped by hundreds of thousands of dollars in the last few weeks. Now, he’s pausing any big purchases. “I feel a little uneasy after the last six weeks of this complete stock market capitulation,” David said. He checks his investment accounts four times a day.

Federal Reserve officials last week responded to the financial uncertainty by slashing their growth projection for 2025. In December, they expected the economy to expand 2.1%. Now, they’re saying 1.7%. Their reason: they’re unsure how Trump’s trade policies will affect growth going forward.

Troy Ludtka, senior U.S. economist at SMBC Nikko Securities Americas, explained the problem. “We’re now at a point where the stock market—a strong stock market—drives consumption,” Troy said. “But the inverse is also true: A weak stock market can lower consumption.”

The behavior Troy described is called the “wealth effect.” It’s a theory from behavioral economics that says when people feel richer—thanks to rising home values and stock gains—they tend to spend more, even if their income doesn’t change. That’s what kept rich Americans spending during the past few years, even while lower-income families struggled with debt and higher prices.

The top 10% have fueled the economy but may be pulling back

According to economists Thomas Ferguson and Servaas Storm, writing for the Institute for New Economic Thinking, the wealth gains of the richest 10% between 2020 and 2023 were nearly unmatched in history.

That top slice of the population kept spending even as their inflation-adjusted incomes shrank. Their spending alone was enough to push total consumer spending above long-term trends.

Moody’s Analytics recently found that Americans earning over $250,000 a year now account for 50% of all U.S. consumer spending. In the 1990s, that group only contributed about one-third. The problem now is that this group is starting to cut back.

Frances Donald, chief economist at the Royal Bank of Canada, said the current situation is split between income groups.

“What we have witnessed in the past two to three years is actually two different economic cycles between higher-income and lower-income Americans,” Frances said. “Anything that impacts your top 10% of Americans now becomes disproportionately important.”

That’s exactly what’s happening. The ultra-wealthy kept the economy going while working-class households pulled back. Now, both groups may be cutting at the same time. And when that happens, there’s no backup plan.

Even though jobs are still available and wages have gone up, especially for low-income workers, that hasn’t been enough to drive growth alone. The spending power of the rich has been a bigger factor than the Fed or many economists realized.

Consumer spending slows across the board

New government data from the U.S. Department of Commerce showed that retail sales increased less than expected in February. January saw the biggest drop in sales since July 2021. Spending at restaurants and bars fell last month by the most in a year.

Luxury spending is also down. Credit card data from Citigroup showed a 5% drop in spending on high-end brands in February compared to the same time last year. And plans for international travel are slowing. A February survey from the Conference Board said only 17% of Americans plan to take a trip abroad in the next six months. That’s the lowest share in five months.

Consumer confidence is taking a hit. A March report from the University of Michigan said overall sentiment is now at the lowest level in more than two years. People’s expectations for their own finances dropped to the lowest level the university has ever recorded. Another report from the Federal Reserve Bank of New York found that the number of people who expect their financial situation to worsen in the next year just hit a 15-month high.

Spending behavior is changing because people don’t trust the direction things are going. They’re not confident in the markets. They’re not confident in policy. And that’s bleeding into how they use their money.

Delinquencies rise among high earners

There’s also been a rise in late payments—especially among high-income earners. Data from credit scoring company VantageScore showed that the number of consumers making more than $150,000 a year who were 60 to 89 days late on debt payments has more than doubled since January 2023.

That’s compared to only a 30% increase in delinquencies among low-income earners during that same time.

Rikard Bandebo, chief economist for VantageScore, said this trend could signal trouble. “If you start seeing that this group is coming under more pressure, that may well have a concerning picture for how consumer spending is going to evolve,” Rikard said.

Thomas Ferguson added that when wealthy people feel pressure, they don’t just reduce spending slowly—they stop all at once. “It’s not like we continue dribbling out some low rate of our wealth. We clam up,” Thomas said. He pointed out that while we haven’t hit that point yet, the signs are moving in that direction.

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