New Jersey proudly holds the title of the Diner Capital of the World, not just for its sheer density of chrome palaces, but because the Garden State was the birthplace of the modular diner itself! Even in this fiercely competitive culinary landscape, Tops Diner in East Newark stands as the undisputed champion, the gleaming, Art Deco-clad gastronomic titan. Tops doesn’t just offer “diner food;” it elevates it. Where else can you pair a perfectly crafted martini with a mountain of legendary Disco Fries (smothered in rich brown gravy and melted mozzarella)? The secret to its reign lies in its blend of the classic and the luxurious: a menu that stretches for pages, offering everything from triple-decker sandwiches to high-end specials like Lobster Mac and Cheese, all cooked in a huge, world-class kitchen. With its massive space, dedicated scratch-made bakery, and neon glow visible for miles, Tops embodies the very best of the Jersey diner ethos – unapologetically flashy, open almost perpetually, and dedicated to serving comfort food that is simply a cut above, cementing its reputation as the state’s true 24/7 dining deity.
Now that you’ve worked up an appetite, the New York Fed’s Survey of Consumer Expectations (SCE) may get your stomach churning. The September issue’s headline – “Short-Term Inflation Expectations Continue to Tick Up; Labor Market Expectations Deteriorate” – at first glance appeared to perpetuate Fed Chair Powell’s dual mandate characterization of near-term upside inflation risks paired with downside employment risks. One-year inflation expectations rose to 3.38% in the current month from 3.20% previously, while higher unemployment expectations increased to 41.11% from 39.12% in the prior frame. To keep the tension between the dual mandates alive, both measures elevated to five-month highs.
Digging deeper on the labor side, the forward view for joblessness couldn’t be more divided along educational attainment lines. Those with a high school diploma (or less) had the lowest conviction of any cohort, a 30.19% expectation that the unemployment rate will be higher one year from now. At the opposite end of the spectrum, consumers with a bachelor’s degree (or higher) anticipated a 52.26% probability. The blue collar/white collar divide has never been wider — the 22.07-point spread was the largest since the 2013 inception of the SCE.
The income spectrum breakdown revealed the top takeaway…and the biggest concerns are at the top. Upper-income higher unemployment expectations rose to 47.21% in September off July’s 42.28% local low, testing March’s post-pandemic peak of 49.83% (teal line). Concerns at the top of the income stack echo tech sector headcount reductions; Challenger’s job cut series pegs tech as the No. 2 industry for pink slips in 2025. On the other hand, the worries may not necessarily translate to job concerns in the same group because its population encompasses managers who are responsible for firms’ staffing decisions. To that end, job finding expectations for workers in the middle-income demographic are mapping a similar pattern when we flipped the series on its head. Moreover, the deterioration through September’s 50.14% reading (inverted fuchsia line) is unlikely to stop there.
The middle being in the crosshairs is illustrated by the next two charts in today’s quad. We defined purchasing power in terms of real income expectations (or nominal income expectations less inflation expectations). For the top earners, the 0.35% spread (3.51% income expectations minus 3.16% inflation expectations, lilac line) landed slightly above the long-run average of 0.11%. However, for the middle, the 2.79% forward view for income was below the 3.55% for prices, making the -0.76% differential (aqua line) below the long-run norm of -0.56%. This is a far cry from November 2024’s post-COVID high of 0.60%.
The consumer resilience narrative is grounded in the top third of earners accounting for more than half of all consumer spending. However, middle-income households should not be dismissed from the conversation as they make up about 30% of all U.S. expenditures. Given those statistics, the SCE’s real spending expectations (nominal spending expectations less inflation expectations) show the middle waning to a two-year low of 1.06% in September (purple line). As recently as six months ago, this metric was nearly twice as large at 1.93%. For comparison, the upper-income group rose from 0.92% to 1.48% over the same six-month span (orange line). The notion of resilience comes from this gauge traveling in the 1% to 2% range for more than two years. However, the idea of vulnerability has surfaced in the middle’s slower guidance that’s more indicative of the cooling year-over-year trend registered for the official consumer spending figures (lime line).
Rising essentials costs for food, gasoline, rent and medical care likely are eating into the budgets of middle-income households more so than their upper-income counterparts. Price expectations for these four goods/services all have risen since the turn of the year: food from 4.05% to 5.85% (blue line); gasoline from 2.00% to 4.23% (yellow line); rent from 5.96% to 6.97% (red line); medical care from 5.76% to 9.28% (green line). Granted, rent expectations have disinflated from June’s 9.05%. However, when spending shares for food, gasoline, rent and medical care are summed up for the top two-thirds, the middle’s 77% reveals a notably large chunk of the budget relative to the upper’s 63%.
Opening the shutdown-sparse diner menu of economic reports revealed the not-so-special of the day coming from capitulation in consumer credit. Revolving credit (i.e., credit card borrowing) fell $6.0 billion in August, marking the third monthly decline in the last six months. The level of revolving credit from February to August has flatlined. For a series whose six-month annualized rate averaged 15%, 10% and 4% in 2022, 2023 and 2024, respectively, the goose egg in the last six months is a manifestation of the middle-income themes gleaned from the SCE. The vulnerability for the consumer discretionary spending cycle remains high on the watch list. Imagine what a sizable stock market correction could do?