Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in.
Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart Stores Inc., the world’s largest discount retailer, reports “everyday Americans” are living paycheck to paycheck as they await an improvement in job prospects.
“The heavy lifting is being done by the upper-income households,” said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. “They’re the ones benefiting the most from the stock market rally, and they’re spending.”
The uneven progress in household expenditures, which account for about 70 percent of the economy, helps explain why Fed policy makers likely will keep interest rates near zero and complete a second round of Treasury purchases. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed.
Consumer purchases reflect bigger gains among high-income households and “financial pressures on those of more-modest means,” according to minutes of the Fed’s Dec. 14 meeting. Feroli estimates the top 20 percent of wage earners account for about 40 percent of spending, while Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, puts their contribution at closer to 50 percent.
Biggest Annual Gain
High-end retailers led the increase in December sales at stores open at least a year, company data showed Jan. 6. The Bloomberg Retail Sales Luxury Index jumped 8.1 percent from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9 percent rise. Nationwide, retail sales climbed 0.6 percent last month, capping the biggest annual gain in more than a decade, according to the Commerce Department.
The U.S. lost about 8 million jobs during the worst recession since the 1930s, and Fed Chairman Ben S. Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption.
Purchases made in the third quarter with American Express Co. credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, reached in 2008, while the combined total for Visa Inc. and MasterCard Inc. didn’t experience a similar rebound, according to company data.
“The labor-market recovery will become more widespread as we go through 2011, which should take away some of the imbalance” in purchases, said Maki, who specialized in researching household finances at the Fed from 1995 to 2000. “We definitely expect to see some catch-up in spending by middle and lower-income households. It’s one of the ways the recovery will become more entrenched.”
Investors placed their bets early on, favoring companies that cater to consumers shopping beyond basics such as groceries and fuel. The Consumer Discretionary Select Sector SPDR Fund, which includes Tiffany, Coach, Best Buy Co. and Nike Inc., outperformed the SPDR Standard & Poor’s 500 ETF Trust from November 2008 through October 2010 by more than 50 percent. The easy gains may be over: The S&P trust has risen 8.8 percent since November 26, 2010, while the consumer-discretionary ETF produced a 4.4 percent gain.
Doug Cliggott, a U.S. equity strategist at Credit Suisse, said he recommends an “underweight” position in these stocks for 2011.
“Three years into the market cycle, it’s very uncommon for consumer discretionaries to be the leadership in the market,” Cliggott said.
In the meantime, rising share prices signal rich shoppers will retain an edge in driving spending. The top 20 percent of income earners own about 80 percent of equity wealth and half of housing wealth, Maki estimates.
The S&P 500 Index has soared 91 percent from its March 2009 low. On top of that, President Barack Obama on Dec. 17 signed into law an $858 billion bill extending Bush-era tax cuts for two years for all income groups, instead of letting them expire for family earnings that exceed $250,000 a year, the cutoff the administration uses for the middle class.
The Census Bureau estimates the poverty threshold for 2010 was $22,314 for a family of four.
“It’s striking,” said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. “Most of the rest of the country is still suffering while the wealthy seem to be largely insulated. You would think they wouldn’t have all that much to complain about. Instead they’ve had unending criticism for the Obama administration.”
Sentiment data reflect the stock-market gains. The Conference Board’s consumer-confidence index for households making more than $50,000 a year climbed in December to a seven- month high, while the gauge fell for income groups in the $35,000-$50,000 and $25,000-$35,000 ranges.
Rising foreclosures and declining real-estate values indicate middle- and lower-income households will remain cash- strapped. The asset value of property held by Americans fell by $649 billion in the third quarter to $16.6 trillion, the Fed said Dec. 9. Home prices may drop as much as 11 percent through the first quarter of 2012, which would be 36 percent below their 2006 peak, according to a Dec. 8 Morgan Stanley report.
“It’s an uneven recovery at this point,” Maki said. “We’re seeing more of a rebound at retailers serving upper-income households.”
Coach, the largest U.S. maker of luxury leather goods, in October raised its North America sales forecast for the rest of the year. In anticipation of holiday-season sales, the New York-based company increased inventory by 36 percent, including its line of Sophia satchels that range from $298 to $1,000. The company will report second-quarter results on Jan. 25.
Tiffany will accelerate store openings for 2011, Chief Financial Officer James Fernandez said on a Nov. 24 conference call. The New York-based jeweler on Jan. 11 forecast profit from continuing operations of as much as $2.88 a share in the year ending Jan. 31, up 11 cents from a November projection and exceeding the $2.79 average estimate of analysts surveyed by Bloomberg.
Maserati, a Fiat SpA brand, said in December that its GranTurismo Convertible has sold out in the U.S., resulting in waiting lists. The luxury car starts at $136,000, according to Edmunds.com, a website that tracks car sales.
There’s been “a greater bounce back in the more-affluent customer,” said Clarence Otis, chief executive officer of Darden Restaurants Inc. He should know: His Orlando, Florida- based company owns both casual-dining chains such as Red Lobster and Olive Garden as well as the upscale Capital Grille steakhouse.
The industry is witnessing a “changing guest mix,” Andrew Madsen, Darden’s chief operating officer, said on a Dec. 21 conference call with investors. “Less-affluent guests who tend to have a lower check are reducing their restaurant visits.”
Family Dollar Stores Inc., the second-biggest dollar-store chain in the U.S., fell 8.8 percent to $44.99 on Jan. 5, the most in more than two years, after its second-quarter forecast fell short of analysts’ projections. Purchasing decisions are “primarily based on want rather than need,” Howard Levine, chief executive officer of the Matthews, North Carolina-based company, said on a conference call that day.
The jobless rate among Americans who haven’t graduated from high school — likely those in low-paid positions — exceeded unemployment among people with at least a Bachelor’s degree by 10.5 percentage points in December, near the record 10.9 point gap set in September.
“The paycheck cycle is still pronounced” for Wal-Mart’s typical customer, Mike Duke, the Bentonville, Arkansas-based company’s chief executive officer, said on a Nov. 16 conference call with investors. “Financial uncertainty still weighs heavily on everyday Americans.”
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