Rising inflation, a rocky stock market and international supply-chain problems are creating plenty of economic uncertainty. But new research from Visa suggests affluent consumers are about to go on an unprecedented spending spree.
From dining out to travel, wealthy consumers who pulled back during the pandemic will soon unleash a quarter of a trillion dollars in pent-up spending, said Wayne Best, Visa’s chief economist, during a keynote address at Arizent’s Payments Forum last week in Phoenix.
“Affluents are spending at a clip of about $22 billion in extra spending per month right now,” Best said, adding that the buying surge is likely to continue through early next year. Visa describes average affluents as consumers whose household incomes begin at $100,000, accounting for about 27% of the U.S. population. Best said a better starting point would be $150,000 but most available data defines this category at $100,000.
According to Visa research, this group encompasses wealthy baby boomers to high-earning young adults in Gen Z working in the tech sector — and drives about 50% of all card spending.
Affluents pulled back more sharply than all other income groups on discretionary spending during the pandemic, and a boomerang effect is in progress, Best said.
“The pandemic’s hit to affluents’ spending was very broad-based, and now we’re seeing all different types of spending rise on food, transportation, recreation and clothing as demand starts to take off,” Best said.
But the spending spree isn't likely to continue indefinitely. One thing that could derail affluent consumers’ spending is a resurgence of COVID-19, Best said.
“As COVID case counts rise, the affluents’ confidence drops, as well as their spending,” Best said, adding that strong levels of discretionary spending could collapse if case counts spike again.
Lower-income consumers are already holding the line on card spending as inflation drives up prices of everyday purchases, Best said.
This bifurcation in consumer behavior will create fresh marketing challenges for card issuers in coming months, Best predicts.
“Market segmentation — that old marketing buzzword from the 1990s — is back,” Best said, referring to card products, promotions and advertising messages that are carefully tailored to appeal to specific audience segments.
The affluents' card-spending surge likely will level out as overall economic growth slows over the next year, according to Visa research.
“We don’t expect to see negative growth … [the economy] is just going to grow at a much slower pace, with potential GDP [gross domestic product] growth of around 1.8%, which will be the slowest decade’s growth in 40 years,” Best said.
One factor expected to depress economic growth is a slowdown in U.S. population growth over the next decade, according to Best.
“No longer are we going to have all this low-hanging fruit with everything growing while the pie keeps getting bigger," Best said. "That pie is going to get a little smaller."
One of Visa's recent forecasts points to a 15% probability of a recession in the next 12 months, but Best said he doesn’t believe a recession is necessarily around the corner.
If consumer demand remains strong and the labor market continues to recover, he said, “it’s pretty hard to go into a recession.”
