U.S. economy may be holding steady overall, but the financial divide is getting harder to ignore. Higher-income households are spending more and seeing stronger wage growth, while lower-income households are increasingly feeling left out, according to recent data from the Bank of America Institute.
According to the institute’s August “Consumer Checkpoint: Gains and Gaps” report, credit and debit card spending per household rose 1.8% year over year in July, the highest growth rate since January. Seasonally adjusted spending was also up 0.6% month over month. However, not all groups contributed equally to that growth.
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“Lower-income households aren’t really spending,” Bank of America Institute Senior Economist David Tinsley told Fortune. According to the report, their spending was flat in the three months to July, while higher-income households increased spending by 1.8% and middle-income households by 1% year over year.
That gap reflects what's happening with wages. Wage growth for lower-income households fell to just 1.3% in July, down from 1.6% in June. In contrast, wage growth for higher-income households rose to 3.2%, its third straight monthly increase.
"The divergence is quite stark," Tinsley told Fortune.
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As a result, many businesses are now shifting focus to customers who continue to spend: wealthier consumers. From luxury airline suites to upscale fast-food menu items, the strategy is clear.
“We've been upleveling the brand,” Walmart WMT Chief Financial Officer John David Rainey told Fox Business earlier this year, noting the retailer has been adding premium brands like Apple AAPL and Bose while remodeling hundreds of stores. Walmart has also gained market share among higher-income households, a point mentioned in back-to-back earnings calls.
Airlines are also investing heavily in high-end travel experiences. In May, United Airlines UAL introduced new luxury business class suites featuring caviar service, part of an industry-wide race to win over wealthier leisure travelers.
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While middle- and higher-income consumers currently make up the bulk of U.S. consumer spending, lower-income households still play a crucial role in high-volume sectors like discount retail, fast food and budget travel.
The Bank of America noted that the lowest-income 30% of households account for less than 15% of total spending, but cutting them out entirely could have longer-term effects. “There are broader socioeconomic concerns around any slowdown in lower-income households' wages and spending,” the report said.
So far, there are few signs of widespread distress. Deposit balances are still higher than 2019 levels—even when adjusted for inflation—and credit card borrowing behavior remains relatively healthy. However, utilization rates among lower-income households are rising faster, and the cushion is shrinking.
Tinsley said the inequality reversal that happened after the pandemic—when lower-income workers briefly saw faster wage growth—is now slipping away. “There was a narrowing of wealth inequality, and now it's widening,” he told Fortune. “There's some time to go before this becomes really telling… but it creates complexities going forward.”
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