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The Rich Catch Everyone Else’s Cutback Fever
By MOTOKO RICH
The provisional economic recovery has been helped in large part by the spending of the most affluent.
Late last year those households started buying with much more confidence, while other consumers held back. Now, even the rich appear to be tightening their belts.
“One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious,” said Mark Zandi, chief economist for Moody’s Analytics.
Federal Reserve policy makers see that the recovery is losing steam and have indicated that should conditions worsen, additional stimulus may be needed, according to minutes of their last meeting, released on Wednesday.
Especially at this stage of a recovery, businesses and economists want to see people of all incomes spending more, because the demand for goods and services would in turn encourage companies to hire workers. The American consumer accounts for an estimated 60 percent of the country’s economic activity.
But the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data.
Retail sales reports and surveys indicate that high earners have grown more cautious, partly in response to the volatility of the stock market and concerns over Europe’s stability and the global economy. They are not alone. The Thomson Reuters/University of Michigan index released Friday showed that consumer confidence slumped in July to the lowest point since August 2009.
According to Gallup, spending by upper-income consumers — defined as those earning $90,000 or more — surged to an average of $145 a day in May, up 33 percent from a year earlier.
Then in June, that daily average slid to $119.
“I think a lot of that feeling that the worst was over has sort of abated,” said Dennis J. Jacobe, Gallup’s chief economist.
Luxury hotel chains like the Four Seasons and Ritz Carlton said bookings were much stronger earlier this year but had recently slowed. And at upscale retailers including Saks and Neiman Marcus, where sales increased late last year and into early this year, the pace of growth eased in June.
Real estate brokers in Manhattan and the Hamptons report that buyers at the high end have returned to the market, and Mercedes sales in the United States are up 26 percent this year.
Still, retail sales at luxury stores slid 3.9 percent in June from a year earlier — after rising 9.7 percent in May — according to data collected by MasterCard Advisors SpendingPulse, which estimates retail sales in the United States made by cash, check and credit cards. Total retail sales slid in June from May, the government reported this week.
To the extent that the wariness of the affluent is driven mainly by nerves and sentiment, economists hope that it will be temporary. “If growth is actually solid, those fears will dissipate,” said Dean Maki, chief United States economist at Barclays Capital and a former senior economist at the Federal Reserve Board.
The worry, of course, is that consumers will stop spending because of their concerns about a slowdown, and that economic growth will slow further because consumers have stopped spending.
After virtually shutting down during the financial collapse in late 2008, the wealthy began to open their wallets wider last year, in part because a stock market rally helped them feel better off financially.
By spring of last year, the savings rate — which represents the percentage of after-tax income not spent — of the top 5 percent of income earners had turned negative, according to the analysis by Moody’s Analytics. That meant the group started spending more than it made.
Less well-off consumers remained more frugal, most likely constrained by unemployment, declines in home values and the disappearance of easy credit. So the savings rate actually rose for those in middle-income brackets as they curbed spending.
Job losses have disproportionately hit those at the lower end of the wage scale. According to the Labor Department, the unemployment rate among people in management, business or financial occupations was 4.8 percent in June, compared with 9.5 percent overall and 18.2 percent in construction and 12.1 percent in production.
As a result, the affluent generally maintained their spending power at a time when others were losing it. “High-income households drove the economy out of recession into recovery and powered the recovery through its first year,” Mr. Zandi concluded. He added that although the incomes of the richest people might have been affected by swings in dividend payments or bonuses, the changes in their savings rate was most likely because of increased spending.
Affluent spenders “began to come out of the bunker about this time last year,” Mr. Zandi said, “and part of it was related to the revival in the stock market.”
People in the highest income bracket are more influenced by movements in equity markets because they tend to have more investments and because they see the Dow as a benchmark of economic sentiment.
Other economists suggest that while Mr. Zandi’s conclusions make some sense, the data is still hazy on the exact role that the rich have played in consumer spending.
“We have tried to do other things like look at consumer expenditures on products mainly purchased by the rich and could never get anywhere,” said Barry P. Bosworth, a senior fellow at the Brookings Institution. “It’s never very convincing one way or another.”
On the ground, those whose sales depend on affluent buyers have seen definite patterns. Last year and early this year, when the major stock gauges were rising, “everybody seemed to be a little bit more optimistic,” said Tom Hauswirth, general manager and partner of Moritz Cadillac, BMW and Mini in Arlington, Tex., near Dallas.
“Then I think everybody was affected when they saw the stock market go below 10,000,” he said. “Even though it may not affect their ability to buy or not, it affects their thinking.”
Mr. Hauswirth said that those who had recently bought new cars were sometimes fearful of being labeled as conspicuous consumers. A few buyers, he said, insisted on purchasing new cars in the same color as their previous models.
“They didn’t want their employees to know they bought a new car,” he said. “It doesn’t look good during a wage freeze or when they’re cutting people.”
Moritz laid off about 15 percent of its sales staff last year, and Mr. Hauswirth said that he did not yet feel comfortable hiring back until sales showed more improvement.
Linda Dresner, the owner of a clothing boutique for women that carries designers like Dries van Noten and John Galliano in the upscale suburb of Birmingham, Mich., has reduced her inventory and says customers often say their husbands have asked them to rein in spending.
“They are wealthy people who live well,” Ms. Dresner said. “But their businesses have suffered some, and they are pulling back.”
The reluctance to spend often reflects psychology more than household finances. On a recent afternoon outside Stuart Weitzman, a designer shoe and handbag store at the Time Warner Center in New York City, an elementary-school teacher who would give only her first name, Esther, left without buying a $525 cream and lavender leather bag that she coveted.
Although she and her husband, who works in finance, came through the recession relatively unscathed, she said she felt nervous about spending. “Even if you have a job and you feel good about your job,” she said, “if everything around you is not good, you don’t feel good.”
Policy makers are divided on what may be needed to spur economic growth, with a current debate raging over whether to extend unemployment benefits, payments that are usually spent immediately. Even Fed policy makers seem divided, based on the minutes of their recent meeting, on whether they should shift their monetary stance to encourage economic activity.
“In the short term we need to do everything we can to raise the consumption capacity of average American households,” said Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington, a left-leaning research center.
“Otherwise, we find ourselves in an ‘Alice in Wonderland’ world where average people are hurting and the solution to the hard times that the economy is going through is to help the people that are not going through hard times.”
For now, some affluent spenders are getting thrifty. Linda Stasiak, who sells high-end skin care products to retailers like Whole Foods, said that her biggest sales increase had been for a $15.95 tube wringer, made to get every last drop out of a bottle of lotion.
“During peak time, I don’t even really remember selling them,” Ms. Stasiak said.
http://www.nytimes.com/2010/07/17/bu...sumers.html?hp
Late last year those households started buying with much more confidence, while other consumers held back. Now, even the rich appear to be tightening their belts.
“One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious,” said Mark Zandi, chief economist for Moody’s Analytics.
Federal Reserve policy makers see that the recovery is losing steam and have indicated that should conditions worsen, additional stimulus may be needed, according to minutes of their last meeting, released on Wednesday.
Especially at this stage of a recovery, businesses and economists want to see people of all incomes spending more, because the demand for goods and services would in turn encourage companies to hire workers. The American consumer accounts for an estimated 60 percent of the country’s economic activity.
But the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data.
Retail sales reports and surveys indicate that high earners have grown more cautious, partly in response to the volatility of the stock market and concerns over Europe’s stability and the global economy. They are not alone. The Thomson Reuters/University of Michigan index released Friday showed that consumer confidence slumped in July to the lowest point since August 2009.
According to Gallup, spending by upper-income consumers — defined as those earning $90,000 or more — surged to an average of $145 a day in May, up 33 percent from a year earlier.
Then in June, that daily average slid to $119.
“I think a lot of that feeling that the worst was over has sort of abated,” said Dennis J. Jacobe, Gallup’s chief economist.
Luxury hotel chains like the Four Seasons and Ritz Carlton said bookings were much stronger earlier this year but had recently slowed. And at upscale retailers including Saks and Neiman Marcus, where sales increased late last year and into early this year, the pace of growth eased in June.
Real estate brokers in Manhattan and the Hamptons report that buyers at the high end have returned to the market, and Mercedes sales in the United States are up 26 percent this year.
Still, retail sales at luxury stores slid 3.9 percent in June from a year earlier — after rising 9.7 percent in May — according to data collected by MasterCard Advisors SpendingPulse, which estimates retail sales in the United States made by cash, check and credit cards. Total retail sales slid in June from May, the government reported this week.
To the extent that the wariness of the affluent is driven mainly by nerves and sentiment, economists hope that it will be temporary. “If growth is actually solid, those fears will dissipate,” said Dean Maki, chief United States economist at Barclays Capital and a former senior economist at the Federal Reserve Board.
The worry, of course, is that consumers will stop spending because of their concerns about a slowdown, and that economic growth will slow further because consumers have stopped spending.
After virtually shutting down during the financial collapse in late 2008, the wealthy began to open their wallets wider last year, in part because a stock market rally helped them feel better off financially.
By spring of last year, the savings rate — which represents the percentage of after-tax income not spent — of the top 5 percent of income earners had turned negative, according to the analysis by Moody’s Analytics. That meant the group started spending more than it made.
Less well-off consumers remained more frugal, most likely constrained by unemployment, declines in home values and the disappearance of easy credit. So the savings rate actually rose for those in middle-income brackets as they curbed spending.
Job losses have disproportionately hit those at the lower end of the wage scale. According to the Labor Department, the unemployment rate among people in management, business or financial occupations was 4.8 percent in June, compared with 9.5 percent overall and 18.2 percent in construction and 12.1 percent in production.
As a result, the affluent generally maintained their spending power at a time when others were losing it. “High-income households drove the economy out of recession into recovery and powered the recovery through its first year,” Mr. Zandi concluded. He added that although the incomes of the richest people might have been affected by swings in dividend payments or bonuses, the changes in their savings rate was most likely because of increased spending.
Affluent spenders “began to come out of the bunker about this time last year,” Mr. Zandi said, “and part of it was related to the revival in the stock market.”
People in the highest income bracket are more influenced by movements in equity markets because they tend to have more investments and because they see the Dow as a benchmark of economic sentiment.
Other economists suggest that while Mr. Zandi’s conclusions make some sense, the data is still hazy on the exact role that the rich have played in consumer spending.
“We have tried to do other things like look at consumer expenditures on products mainly purchased by the rich and could never get anywhere,” said Barry P. Bosworth, a senior fellow at the Brookings Institution. “It’s never very convincing one way or another.”
On the ground, those whose sales depend on affluent buyers have seen definite patterns. Last year and early this year, when the major stock gauges were rising, “everybody seemed to be a little bit more optimistic,” said Tom Hauswirth, general manager and partner of Moritz Cadillac, BMW and Mini in Arlington, Tex., near Dallas.
“Then I think everybody was affected when they saw the stock market go below 10,000,” he said. “Even though it may not affect their ability to buy or not, it affects their thinking.”
Mr. Hauswirth said that those who had recently bought new cars were sometimes fearful of being labeled as conspicuous consumers. A few buyers, he said, insisted on purchasing new cars in the same color as their previous models.
“They didn’t want their employees to know they bought a new car,” he said. “It doesn’t look good during a wage freeze or when they’re cutting people.”
Moritz laid off about 15 percent of its sales staff last year, and Mr. Hauswirth said that he did not yet feel comfortable hiring back until sales showed more improvement.
Linda Dresner, the owner of a clothing boutique for women that carries designers like Dries van Noten and John Galliano in the upscale suburb of Birmingham, Mich., has reduced her inventory and says customers often say their husbands have asked them to rein in spending.
“They are wealthy people who live well,” Ms. Dresner said. “But their businesses have suffered some, and they are pulling back.”
The reluctance to spend often reflects psychology more than household finances. On a recent afternoon outside Stuart Weitzman, a designer shoe and handbag store at the Time Warner Center in New York City, an elementary-school teacher who would give only her first name, Esther, left without buying a $525 cream and lavender leather bag that she coveted.
Although she and her husband, who works in finance, came through the recession relatively unscathed, she said she felt nervous about spending. “Even if you have a job and you feel good about your job,” she said, “if everything around you is not good, you don’t feel good.”
Policy makers are divided on what may be needed to spur economic growth, with a current debate raging over whether to extend unemployment benefits, payments that are usually spent immediately. Even Fed policy makers seem divided, based on the minutes of their recent meeting, on whether they should shift their monetary stance to encourage economic activity.
“In the short term we need to do everything we can to raise the consumption capacity of average American households,” said Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington, a left-leaning research center.
“Otherwise, we find ourselves in an ‘Alice in Wonderland’ world where average people are hurting and the solution to the hard times that the economy is going through is to help the people that are not going through hard times.”
For now, some affluent spenders are getting thrifty. Linda Stasiak, who sells high-end skin care products to retailers like Whole Foods, said that her biggest sales increase had been for a $15.95 tube wringer, made to get every last drop out of a bottle of lotion.
“During peak time, I don’t even really remember selling them,” Ms. Stasiak said.
http://www.nytimes.com/2010/07/17/bu...sumers.html?hp
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