1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 66
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
By diving deeper into the data, we can decompose total household spending across income
groups to gauge the role of high income households in driving aggregate consumption. Instead
of relying on the CEX, we infer consumption from aggregate income and balance sheet data using
the national accounting identity that consumption equals disposable personal income minus
savings. Disposable personal income data is taken from the Bureau of Economic Analysis at the
aggregate level, while differences in savings behaviour across income groups are proxied using
changes in household net worth by income cohort from the Fed’s Distribution of Financial
Accounts. In effect, households with faster balance sheet accumulation are assumed to be saving
a larger share of their disposable income, while households with more limited wealth
accumulation are assumed to consume a greater share. Using this framework, we estimate the
top 20% of income earners now account for an increasingly large share of household
consumption – around three-fifths.
Higher income households account for about three-fifths of total consumption
Estimated consumption share
100%
75%
50%
25%
0%
1990
1994
1998
2002
Top 20%
2006
2010
2014
2018
2022
Bottom 80%
Source: Survey of Consumer Finances, Bloomberg Finance LP, Scotia Wealth Management
This estimate is broadly in line with a recent report from the Dallas Fed in which the authors take
the analysis a step further by adjusting for household tax liabilities, mechanically reducing the
share of disposable income that is attributed to top earners given their higher tax burden. The
Dallas Fed’s analysis places the top quintile’s share of consumption at a 57% average for the postCovid era, up ~4ppts from the average observed during the 1990s. Their analysis also found that
the top quintile’s income share has averaged ~60% in the 2020s, >5ppt higher than the average
during the 1990s, while their net worth share is now ~70%, up 10ppt from the prior period.
Scenario analysis by the Dallas Fed also shows that the macroeconomic implications of a more
concentrated consumer base depend on the nature of a potential economic shock. Adverse
shocks to wages or employment tend to have a relatively modest impact on aggregate
consumption due to the role of stabilizers like unemployment insurance and social safety nets.
On the other hand, shocks to the rate of return on assets, which proxy an equity market
downturn, have a more pronounced effect on consumption.
Importantly, the analysis also finds that as the economy becomes more concentrated, labour
market shocks lead to smaller declines in aggregate consumption, while asset price shocks lead
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