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Trouble on Main Street
The federal government shutdown became the longest in U.S. history on Wednesday, surpassing the prior record of 35 days in 2018-19. Americans are feeling the pain. Government food assistance stalled this week for more than 40 million, straining food banks. Roughly 1.4 million federal workers have been furloughed or worked without pay since early October, according to the Bipartisan Policy Center.
These pains will be temporary, and it’s possible that by the time this newsletter lands in your inbox, Congress will end the shutdown. But this episode in history underscores the reality that the American economy has grown decidedly k-shaped. Federal Reserve Chair Jerome Powell said on Oct. 25 that he was seeing the signs. “… if you listen to the earnings calls or the reports of big, public, consumer-facing companies, many of them are saying that there's a bifurcated economy there and that consumers at the lower end are struggling and buying less,” he said. “… at the top, people are spending.”
Powell said the data, so far, was anecdotal, but there are numerous clear indicators that illustrate these dynamics.
The Bank of America Institute reported on Oct. 10 that wage growth had cooled for lower-income households, at 1.4% year-over-year, compared to higher-income households at 4%. Credit and debit card spending increased by 2% overall but slowed for lower-wage households. “There was a bifurcation in terms of the spending between higher-income and lower-income households,” Liz Everett Krisberg, head of the bank’s research arm, told CNBC. Consumers are spending, but it’s driven by those earning higher wages.
The Conference Board reported on Oct. 28 that consumer expectations for the future had waned. Holiday spending could be down.
KPMG Senior Economist Ken Kim sees signs of two separate economies in the Fed’s most recent Senior Loan Officer Opinion Survey. “Banks reported stronger loan demand for large firms while smaller firms reported stagnation,” he wrote on Nov. 4. “… banks were more likely to approve credit card applications for super-prime and prime borrowers while less likely to approve those for subprime borrowers. We are increasingly seeing signs of a k-shaped economy and rising inequality.”
In recent earnings calls for the biggest banks, CEOs expressed optimism about consumer spending. But bank leaders should understand that the top-line number doesn’t fully describe the reality within.
• Emily McCormick, vice president of editorial & research for Bank Director
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