November businessmen are expected at the Langham Hotel in Boston as luxury travelers book rooms in the gausape suite and have meetings in the gilded conference room. The $135-per-adult Thanksgiving brunch at his restaurant sold out weeks ago.
Across town, in Dorchester, there was a ringing demand for different food services. Catholic Charities sees so many families in dire straits that Beth Chambers, president of basic needs at Catholic Charities Boston, has had to close early some days and tell patrons to return first thing in the morning. On a cold Saturday morning before Thanksgiving, patrons lined the street waiting for free turkeys at 4:30 a.m. — more than four hours before the store opened.
The contrast illustrates the division that has rippled through America’s topsy-turvy economy nearly three years into the pandemic. Many well-off consumers are still thriving with savings and financial well-being, highlighting luxury brands and keeping some high-end retailers and travel companies at their best around the holiday season. At the same time, America’s poor are running low on cash buffers, so that when prices rise, they may struggle against borrowing costs if they use credit cards or loans to make ends meet.
The situation is pressing in the grim reality of the pandemic era. The Federal Reserve is raising interest rates to encourage more spending and moderation, hoping to cool the economy and bring back the fastest growth in decades under control. Central bankers are trying to manage what leaves families out of work without retirement. But the timing adjustment is already painful for many Americans — a sign that even if the central bank can pull back on its so-called “tight harbor,” it won’t feel good to everyone.
“Many of these families are moving toward greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Many working families will do well in 2020 and 2021. Although they lost business quickly at the beginning of the pandemic, employment rebounded quickly, wage growth was strong, and repeated subsidies helped families accumulate savings.
But after 18 months, rapid price increases — some of which were demand-driven stimulus — helped those poor cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — at the middle of this year based on H estimates, but about $1.35 trillion of that was held by the top half of earners and only $350 billion in the bottom half.
At the same time, prices rose 7.7 percent in the year through October, far faster than the roughly 2 percent pace that was normal before the pandemic. As savings run out and necessities like car repairs, fuel and housing become more expensive, many in lower-income neighborhoods have begun turning to credit cards to support them. The balance of that group is now above 2019 levels, a New York research study shows. Some people struggle to keep it at all.
“With the cost of food, the cost of explosive eggs, people have more to us,” said Ms. rooms of Catholic charities, explaining that other rising prices, including rent, increase the competition. The site is targeting 1,000 turkeys and 600 gift cards for the turkeys, as part of its holiday distribution, along with bags of canned corn, corn, gravy and other Thanksgiving items.
Tina Obadiaru, 42, was among those who lined up to take Turkey on Saturday. A mother of seven, she works full-time caring for residents in a group home, but it’s not enough to make ends meet for herself and her family, especially after the Dorchester rent jumped from $2,500 to $2,000 last month.
“It’s going to be difficult,” he said.
The disproportionate burden of inflation on the poor is one of the reasons H officials are rushing to quickly bring price increases back under control. Central bankers have raised interest rates from near zero earlier this year to nearly 4 percent, and have signaled that more is to come.
And the process of lowering inflation is also likely to hurt people with lower incomes. The policy is fueled in part by making it more expensive to borrow to support consumption, which causes demand to decline and eventually supply sellers to charge less. Rate increases also slow the labor market, cooling wage growth and possibly even market costs.
That means the solid labor market that has put the working class through this challenging period, which has pushed up wages the most in lower-paying businesses, including unemployment, hospitality, and transportation, could rebound quickly. In fact, H officials are looking at spending and earning profits as they work to signal their plans.
“While higher business, slower growth and softer trade conditions will lead to growth, they will also bring pain to families and businesses,” Jerome H. Powell, chair of H, said at a key H conference in August. “These are unfortunate subsidies to reduce inflation.”
Central bankers believe that the measure of pain today is better than what it would be if inflation were allowed to continue unabated. If people and businesses began to expect the rate of price increases and do so, — creating large demand movements, frequent and large price increases — the inflation of the economy could be protected. This would then lead to a more severe response to the policy, which could push unemployment even higher.
But accumulating evidence across the economy will understand that the slowdown in the H machine, however necessary, is likely to be felt across different income groups.
Consumer spending has so far been moving at a modest rate. Data sales were significantly moderated in the first year, but have recently recovered. Personal consumption expenditures are not spread to the break-even level, but are increasing.
Yet beneath those aggregate numbers, change appears to be taking place — one that highlights the growing economic comfort divide between rich and poor. Credit card data from Bank of America suggest that high- and middle-income families have replaced lower-income families in posting additional growth in recent months. Poorer shoppers accounted for a fifth of the increase in discretionary spending in October, compared with two and a fifth a year earlier.
“This is likely because lower-income groups are the most negatively impacted by rising prices — they also saw the largest increases in bank research,” economists at the Bank of America Institute wrote in a Nov. 10 note.
Even as the poor face the pressure of higher prices and higher interest rates, economists note that continued economic health among wealthier consumers may force demand in areas where wealthier people tend to spend their money, including services such as travel and hotels.
At the Langham, a newly renovated hotel in a century-old building that once served as the Federal Reserve Bank of Boston, there is little to suggest a slow pace of spending.
In the hotel’s “Fedo” bar, named in a nod to the building’s heritage, waiters are doing business every week throwing cocktails with names like “Hang Fund Baby” and “Apple Butter Me Up” (both $16). When guests returned from shopping on nearby Newbury Street, hotel manager Michele Grosso said, their arms were full of bags. He sees the fact that Thanksgiving brunch sold out so quickly as a sign of continued demand.
“If people are going backwards, we’re still going to be promoting,” he said of the three-course family dinner. “Yes, waiting for the album I got.”
The consumption divide playing in Boston is also evident on a national level, echoing calls for corporate earnings. American Express added customers to its platinum and gold cards at a record clip in the United States last quarter, for example, as it reported “significant demand” for premium, product-based products.
“As we sit here today, we see no changes in the spending of our customers,” Stephen J. Squeri, the company’s chief executive officer, told investors in a earnings call last month.
Companies that serve more low-income consumers, however, have been flagged as advertisers.
“Many consumers this year have tried to borrow or dip into their savings to manage their weekly bills,” Brian Cornell, Target’s chief executive, said on a Nov. 16 earnings call. run out As a result, our guests are showing increased price sensitivity, are more focused and ready for promotions and are becoming more hesitant to purchase on price.”
The split makes it difficult to predict what will happen next with spending and inflation. Some economists believe that the price sensitivity of income among lower-income consumers will be enough to support overall cost control, paving the way for a significant slowdown in 2023.
“You promote more business, and companies compete for the market share,” said Julia Coronado, founder of MacroPolicy Comments.
Others, however, warn that although the very poor are struggling, it is not enough to bring the costs and prices significantly.
Many families paid off their credit card balance during the pandemic, and this is now back, despite high credit rates. Borrowing could support families for a while, especially with strong job gains and the recent drop in gas prices, said Neil Dutta, head of economics at Renaissance Macro.
The world is waiting to see if H can slow the economy enough to control inflation without forcing the country into a deep recession, who come to Catholic Charities in Boston to illustrate why the stakes are so high. Although many have jobs, they have been hit by rapid price shocks for months and now face an uncertain future.
“Before the pandemic, we were thinking about cases,” Ms. said the chambers, indicating how much food was necessary for the needs of the place. “Now we’re just thinking about running.”