Low-Income Americans Cut Spending, a Dire Economic Warning

The Struggle of U.S. Consumer Spending

Despite the Federal Reserve’s recent rate cut and the stock market continuing to perform well, the U.S. economy is encountering significant challenges, particularly in the realm of consumer spending. This key economic driver, which has long been a pillar of growth, is showing signs of weakening. Consumers across all income levels are becoming more cautious, seeking discounts, and reducing their overall spending. This shift is especially noticeable among lower-income individuals, who are facing increasing pressure from rising prices and other economic factors that are diminishing their purchasing power.

Claire Li, a vice president of credit strategy at Moody’s, highlights that the decline in consumer spending is not just a general trend but a fragmented one. “If the benefits and the pressures are not shared broadly, then we’re not looking at a balanced or a healthy state of the U.S. consumer base,” she explains. Working-class Americans, already dealing with stagnant wage growth and higher housing and utility costs, are particularly vulnerable. Recent reports from Moody’s indicate that these consumers are increasingly relying on savings, taking on more debt, and cutting back on discretionary purchases.

Meanwhile, middle- and upper-income consumers are adopting a more strategic approach to their spending. They are buying in bulk, shopping at more affordable retailers, and being selective about major purchases. Retailers like Walmart, Dollar General, and Dollar Tree have reported increased sales among wealthier customers seeking value. However, even this segment is not immune to the broader economic slowdown. Sales in the luxury sector are declining as consumers become frustrated with brands that charge higher prices without offering improved quality or compelling new products.

Although high earners continue to support consumer spending, which accounts for approximately 70% of the GDP, this support is becoming narrower. The top 10% of earners, making $250,000 or more annually, accounted for nearly half of total spending in the second quarter, up from 45.8% two years ago. Despite this, experts like Marshal Cohen, chief retail adviser at Circana, argue that this narrow base is insufficient to sustain the economy. “When the lower income falls behind their spending power of previous years, it’s not easy to make up the difference,” he says.

Signs of Economic Uncertainty

Several major brands and retailers have lowered their financial outlooks for the year, signaling a potential downturn. Target, for example, is planning cautiously for the back half of the year due to continued uncertainty and volatility. Similarly, companies like PepsiCo, Kimberly-Clark, and Procter & Gamble have reduced their earnings guidance as tariffs impact their margins and consumers switch to cheaper alternatives.

Restaurants such as Chipotle, IHOP, Applebee’s, and Sweetgreen have also noted a decline in customer spending. Jonathan Neiman, co-founder and CEO of Sweetgreen, remarked that the consumer is not in a great place overall. Recent government data supports this sentiment, showing a slowdown in retail sales. Adjusted for inflation, August retail sales saw only marginal growth after years of strong performance.

Cohen points out that unit sales—measuring the total sales of a product within a specific time frame—are flat or decreasing in many categories. This indicates that lower-income consumers are becoming more frugal and focused on value. However, he cautions that certain high-ticket items, such as video games and premium beauty products, can skew the data by boosting sales in specific categories without reflecting broader trends.

Rising Costs and Eroding Purchasing Power

Lower-income Americans are often the first to feel the effects of an economic downturn. The cooling labor market has disproportionately impacted their spending, despite a significant wage increase during the pandemic. Li notes that wage growth has slowed, and rising housing and utility costs are further squeezing this group. According to the latest consumer price index report, gas and electricity bills increased by 13.8% and 6.2%, respectively, over the past year.

The poorest 20% of Americans spend about 40% of their income on housing, compared to less than 30% for the wealthiest 20%. Housing expenses take priority, leaving little room for other purchases. Grocery inflation hit a two-year high in August, and tariffs are driving up prices for essential goods like apparel, toys, appliances, and furniture. Additionally, student loan repayments, which resumed earlier this year, are adding to the financial burden for many.

Cohen predicts that this group will accumulate more debt during the holiday season, using credit cards and buy-now-pay-later services to manage their expenses. Parents, in particular, are determined not to let their children suffer due to economic struggles.

Lanadjah Greene, a 23-year-old from Milwaukee, illustrates the challenges faced by many lower-income individuals. She moved from Colorado to Wisconsin hoping to save money, but living expenses remain high. She now relies on store-brand products and takes on extra work to make ends meet. Her savings, which are 22% below pre-pandemic levels, are dwindling, making her more vulnerable to unexpected expenses.

Future cuts to federal assistance programs, such as Medicaid and SNAP, could exacerbate the situation, according to Cohen. These changes could force consumers to spend on previously unaffordable items, further eroding their purchasing power.