The latest U.S. budget bill, which is expected to benefit wealthy households at the expense of lower-income households, will also drive a divergence in corporate credit risks, according to Moody’s Ratings.
In a new report, the rating agency said that as the provisions of the latest budget take effect in the years ahead, higher-income households will see their assets grow, and the resources of lower-income households are set to shrink.
Indeed, recent estimates from the Congressional Budget Office (CBO) indicate that, while the bill is expected to produce a modest increase in average household income, there are sharp disparities between households, the report said.
The 10% of households at the bottom of the income distribution are expected to see their finances take an annual US$1,200 hit on average, as certain tax credits expire and assistance benefits are reduced — while the top 10% are forecast to see annual income rise by an average of US$13,600 on the strength of tax cuts that favour the wealthy.
In turn, it’s expected that businesses that service more-affluent households “will do better” in the coming years, while “credit stress will rise” for companies that are more exposed to lower-income households, the rating agency suggested.
As these tax cuts boost incomes for wealthier households, discretionary spending by this segment “will remain resilient even as key fiscal supports for other households wane,” the report said.
“Gains in after-tax-and-transfer income for households in the top 40% of the income spectrum will support demand for luxury retail, travel and premium services,” it said.
Conversely, businesses that more exposed to middle- and lower-income households — such as the mass-market retail, auto lending and mid-tier consumer finance sectors — face the prospect of “uneven financial performance” as weaker incomes “risk pressuring business margins.”
A drop in income for poorer households, which have a higher marginal propensity to consume, will also likely weaken demand in price-sensitive sectors, the report said.
“With already-thin margins, companies more exposed to lower-income households will be particularly vulnerable to a slowdown in revenue,” it noted.
These pressures will be compounded by U.S. tariffs, which also hurt lower-income households more than other groups.
“In raising the cost of goods, tariffs erode real purchasing power, posing elevated risk to households with lean financial resources and businesses that serve this group,” the report said.
Additionally, the credit quality of these households will likely decline, it noted.
“The sustained deterioration in these households’ purchasing power will lead to credit pressures in sectors such as discount retail, subprime consumer finance and discretionary services providers,” the report said.
Overall, the gains for wealthier households should more than offset the losses for lower-income groups — the top 20% of households account for 40% of total consumption versus less than 10% for the bottom 20% of households — but demand is expected to skew toward higher-end discretionary spending, “creating risks to broad-based consumption.”