Low-Income Americans Face Economic Challenges

The burden on low-income and young Americans is increasingly becoming palpable. Last week, the Federal Reserve and restaurant chain Chipotle (CMG) were the latest examples pointing to a separate economic landscape in the United States.

After the central bank's most recent interest rate cut, Federal Reserve Chairman Jerome Powell indicated that the economy remained generally resilient, while acknowledging that this strength was uneven and spending was increasingly concentrated among high-income households.

Powell stated, “Consumer spending is rising and is defying many negative forecasts.” He admitted, “This is mostly being driven by top-tier consumers. However, consumers are spending. This is playing a significant role in the economy and is having a much greater impact than productivity gains from artificial intelligence.”

Powell's remarks highlight a connection being made as economists assess the role of artificial intelligence in keeping the economy away from recession while the increase in investments in data centers and chips has boosted stock gains, bringing spending from high-income households to the forefront.

However, this upper-tier strength is not being felt by everyone, and companies reliant on everyday consumers may begin to feel the negative effects of this situation. In Chipotle's earnings call, CEO Scott Boatwright noted a meaningful drop in the chain's young and low-income customer base. This led to a 20% decline in the company's stock.

Boatwright said, “Earlier this year, we saw a sharp decline in consumer sentiment, with a broad decrease across all income groups. Since then, we have observed a further decline in the frequency of visits from guests in lower income brackets.”

High-income households, which account for about 40% of Chipotle's sales, have indicated a significant cutback in spending among households earning less than $100,000, with Boatwright emphasizing that this is not just a trend specific to Chipotle but is seen in all restaurants and many discretionary categories. This group is facing a range of negative conditions such as unemployment, rising student loan payments, and slowing real wage growth.

Data supports this. In August, the unemployment rate for Americans aged 20-24 was recorded at 9.2%, which is higher than the 7.9% a year ago and the highest level seen since early 2021. Peter Saleh, managing director and restaurant analyst at BTIG, described the decline in Chipotle's young customer base as "somewhat concerning," noting that this situation developed suddenly in September and October.

This weakness is not limited to Chipotle. TD Securities reported that its own survey results regarding consumer sentiment revealed “a sharply divided economy.” Tristan Margot, head of thematic content at TD Securities, stated, “High-income households are at historically low levels in their intent to cut spending. Meanwhile, middle and low-income households are consistently experiencing economic concerns.”

These concerns were also echoed by a decrease in the Conference Board consumer confidence index in October. The index reflects growing worries about unemployment, inflation, and borrowing costs. Policymakers are observing this situation. Powell warned that the economy is signaling irregularities and that the upper-tier strength is masking underlying weaknesses. He pointed to high-profile layoffs at Amazon (AMZN), UPS (UPS), and other major companies.

“As more companies announce hiring freezes or layoffs, we are monitoring the situation very carefully,” Powell said. While current data does not broadly show a deterioration in employment, it is noted that such effects may take time to become visible, with job losses potentially exacerbating this situation. “As low-income Americans pull back, higher-income households continue to spend,” he underscored a significant point.