Rich people are worried about spending. That’s bad news for everyone else

By Nicole Goodkind, CNN Business

After a period of angst, Americans appear to be feeling a bit better about the economy.

What’s happening: The Conference Board’s consumer confidence index for August, scheduled for release later today, is expected to increase by 1.8 points to 97.5, according to Goldman Sachs analysts. That comes after three consecutive months of declines.

Meanwhile, the final results of the University of Michigan’s consumer sentiment survey this month showed a big surge in the outlook for the year ahead.

That might sound like great news. But a closer look at the numbers shows a more concerning picture. The problem is that wealthy Americans aren’t as jazzed, and that could signal more pain ahead for markets and the economy at large.

“High income consumers, who generate a disproportionate share of spending, registered large declines in both their current personal finances as well as buying conditions for durables,” Michigan researchers wrote.

Why it matters: Spending from the top 20% of earners made up nearly 40% of total consumer spending in the United States in 2020, according to data from the Bureau of Labor Statistics. And consumer spending is the most important driver of US economic growth.

Of course, there can be a difference between how people say they feel and what they actually do. But in this case, we’re starting to see some real impact.

Analysts at the Bank of America Institute found that total credit card spending per household (excluding grocery, gas and clothing) for consumers making more than $125,000 has contracted for three consecutive months while remaining fairly resilient for the lower-income consumer.

There are other signs that the rich are trading down. Walmart CFO John David Rainey told CNBC earlier this month that buyers were purchasing fewer high-margin discretionary items like clothing because inflation was making them shell out more for necessities. He also, interestingly, noted that about three-quarters of Walmart’s second quarter market share gains in food came from customers with annual household incomes of $100,000 or more.

High-income diners are also reportedly swapping pricier restaurants for budget-friendly standards like Applebee’s and IHOP.

Sales at the two chains, which are both owned by Dine Brands, grew about 6% to 8% among households earning over $75,000 per year in the second quarter, according to Dine CEO John Peyton. The bump “suggests to us that guests that often dine at more expensive restaurants are finding Applebee’s and IHOP because of their well-known value position,” Peyton said during a call with analysts earlier in the month.

That might sound positive for companies that are well-positioned to benefit from such shifts in habits. The problem is that sentiment among lower-income consumers typically lags higher-income sentiment, which means a larger slowdown could be on its way.

“In an economy that’s 60% driven by services, you can see how easily that outlook on spending in a narrow group of income earners has a bigger effect on a larger group of Americans,” Marvin Loh, senior global macro strategist at State Street, told me. “This is the definition of trickle-down.”

Investor insight: That doesn’t bode well for stocks of companies that sell items people want but don’t necessarily need. Names like Amazon, Home Depot and LVMH helped rocket the sector from its mid-June lows, rising nearly 30% through mid-August before hurtling back down. The sector dropped precipitously after Federal Reserve Chairman Jerome Powell indicated that there would be “pain” ahead as the US central bank continues its tightening policy.

“The gains that we saw over the last six weeks didn’t make a whole lot of sense to me,” Loh said.

Thanks a (pumpkin) latte

It’s 88 degrees in New York City and California is grappling with a devastating drought. But as far as Starbucks is concerned, it’s time to break out the chunky sweaters. The Pumpkin Spice Latte is back in stores.

While the PSL may be weather-resistant, it isn’t immune to inflation. The fall favorite, my CNN Business colleague Jordan Valinsky reports, is getting more expensive, with a grande-sized hot drink costing customers between $5.45 to $5.95 depending on location — a roughly 4% increase compared to 2021.

Starbucks is hardly alone. Earlier this year, Burger King removed the Whopper from its value menu and trimmed its 10-piece nuggets to eight pieces. Chipotle has hiked prices at least three times since August 2020. Dunkin’, Taco Bell, The Cheesecake Factory and McDonald’s have also increased prices to account for increasing inflation. In the past year, the cost of food has grown by about 11%. That’s the highest reading in more than 40 years.

Thus far, consumers have continued to absorb high prices on discretionary goods, but as inflation and interest rates continue to rise, some wonder if this fall and holiday season will mark a turning point.

“This year, we’re looking at negative discretionary cash flow for the first time since the 2008-09 financial crisis,” said Goldman Sachs consumer goods analyst Jason English last week. Goldman estimates there will be a 1.2% drop this year in discretionary cash available for the holiday season.

Starbucks is certainly watching. The PSL has historically been a huge seasonal sales driver for the chain. In 2021, Starbucks experienced a noticeable uptick in sales the week they started selling PSLs. The 10% week-over-week increase was the biggest jump in weekly sales since spring.

And while PSL season may be a little lackluster this year, Goldman expects spending to pick up in the new year. Consumer cash flow will rise by 6% in the second half of 2023, they predict. That’s an overall gain of nearly $600 billion, or about 110 billion lattes.

This Fed official is happy that stocks are plummeting

Markets took a beating last week — and that’s not necessarily a bad thing, according to one Fed official.

The plummet that followed Fed Chair Jerome Powell’s Jackson Hole speech on Friday shows that investors are finally taking the Fed’s commitment to lowering inflation rates seriously, Minneapolis Fed President Neel Kashkari said in an interview with Bloomberg’s Odd Lots podcast on Monday.

“I was actually happy to see how Chair Powell’s Jackson hole speech was received,” said Kashkari

“I certainly was not excited to see the stock market rallying after our last Federal Open Market Committee meeting,” he added. “Because I know how committed we all are to getting inflation down. And I somehow think the markets were misunderstanding that.”

Markets have fallen significantly since Powell’s speech where he said that the fight against inflation will bring “some pain to households and businesses.”

The S&P 500 closed 3.4% lower Friday, its worst day since mid-June. It pulled back again on Monday.

Up next

▸ The Conference board releases US consumer confidence for August at 10am Eastern

▸ JOLTS job openings for July are released at 10am Eastern

▸ Earnings from Baidu, Best Buy, HP, Hewlett Packard Enterprise, Chewy, PVH and CrowdStrike

On Tuesday: US ADP private sector employment; China official PMI; India GDP; earnings from Evergrande, Meitu, Brown-Forman and Designer Brands

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