The American Consumer Paradox: Gloom Meets Spending Resilience
As America prepares for another frenzied holiday shopping season with Black Friday and Cyber Monday sales, retailers face a curious economic contradiction. While consumer sentiment has plummeted to near-historic lows, actual spending continues to defy expectations, creating what economists call a "decoupling" between how Americans feel and how they spend.
Record-Low Sentiment vs. Steady Spending
The University of Michigan's closely watched consumer sentiment index recently fell to levels barely above its June 2022 nadir, which marked the lowest point since tracking began in 1952. American consumers express deep concerns about job prospects and persistent inflation, telling pollsters they plan to cut back on expenditures.
Yet the reality tells a different story. According to Census Bureau data released in late November, spending at retailers and restaurants in September showed a 1% year-on-year increase after adjusting for inflation. This hardly suggests consumers are tightening their belts, presenting businesses with a challenging puzzle: how long can this mismatch between gloomy sentiment and resilient spending continue?
The Wealth Effect and Luxury Resilience
One key explanation lies in the divergent experiences of America's economic classes. Consumer sentiment surveys treat rich and poor Americans equally, but their spending patterns differ dramatically. Despite recent market fluctuations, America's stock market remains elevated, boosting consumption among the share-owning wealthy.
This wealth effect manifests clearly in luxury markets. LVMH, the world's largest luxury goods purveyor, reported 3% sales growth in America during the July-September quarter compared to the same period in 2024, recovering from first-half declines. Similarly, consumer-goods giant Unilever noted that premium products drove its American sales growth in the third quarter.
Budget-Conscious Consumers Adapt
For lower-income Americans, the economic strain is more pronounced. Restaurant chain Chipotle and home-improvement retailer Home Depot both reported decreased business from lower-income customers in recent months. Yet even this demographic continues increasing overall spending, albeit at a slower pace.
Research firm Numerator reveals telling data: consumers earning over $100,000 spent 4.3% more in the third quarter than a year ago, while those earning under $60,000 increased spending by 3.8%. To stretch their dollars further, budget-conscious shoppers are changing where they shop, with value-oriented retailers like T.J. Maxx enjoying sales bumps.
The "Lipstick Effect" in Fragrance Form
Another phenomenon supporting spending is what economists call the "lipstick effect"—named for beauty tycoon Leonard Lauder's observation that lipstick sales rise during recessions as consumers seek small indulgences. Today, this effect appears in fragrance sales rather than cosmetics.
According to Circana research data, mass-market fragrance sales in America grew by 17% year-on-year during the January-September period. L'Oréal CEO Nicolas Hieronimus recently pondered whether to rename this phenomenon the "smell good fragrance effect," highlighting how consumers continue spending on affordable luxuries despite economic anxieties.
Holiday Season Outlook
As the Christmas shopping season approaches, retailers hope consumers will maintain their spending despite persistent gloom. Many analysts remain optimistic about holiday sales. Wells Fargo economist Shannon Grein suggests that "a longing for comfort will help keep overall holiday sales elevated," with her team predicting 3.5-4% nominal retail spending growth in November and December—comfortably above inflation rates.
This American consumer paradox presents a fascinating economic case study. While spending currently outpaces sentiment, economists watch closely to see if eventually, what Americans spend will catch up with how they feel, potentially reshaping retail landscapes and economic forecasts in the coming months.
