The shake-up in the stock market which started on July 22 causing its decline on average by 13% may mean lower sales for retailers selling luxury goods, including Tiffany, Neiman Marcus, Zales, Saks Fifth Avenue, Coach, Movado, etc.
The shopping habits of Americans who make more than $100,000 a year are tied to the positive wealth effect of rising shares, so the across-the-board decline in recent weeks is likely to hurt high-income consumers, according to Robert Dye, chief economist at Comerica Bank.
Their spending “has been a driving force for the economy in this recovery and the recent sell-off of equities is a fundamental threat to that,” said the bank economist, who is based in Dallas.
“The top 20 percent of households account for about 40 percent of consumer spending,” Bloomberg reports citing Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Federal Reserve economist. “Since consumer spending represents 70 percent of U.S. gross domestic product, any pull-back in consumption by upper-income households would present a challenge for overall GDP growth,” Feroli said.
Consumer spending unexpectedly contracted in June for the first time in almost two years, falling 0.2 percent after a 0.1 percent gain the prior month, according to the U.S. Department of Commerce. That has contributed to a recovery that’s already “considerably slower” than expected, according to the Federal Reserve.
Many consumers fear a repeat of 2008, when the market crash led to deep cuts in spending among the wealthy and forced retailers to “cast prudence to the winds” and offer discounts as high as 70% off fresh designer merchandise. Luxury was the worst-hit retail sector during the recession, the Los Angeles Times says.
Affluent consumers have already cut spending on "nice trinkets", according to the Unity Marketing Inc., which tracks retail trade in luxury goods. Well-fixed Americans spent 18 percent less on expensive goods in the quarter ending June 30 compared with a year ago.
A week ago, Michael Heller, a successful management consultant from Los Angeles, was ready to drop thousands of dollars on a Jaeger-LeCoultre time piece. But the recent stock market upheaval made him rethink the splurge. "Instead of making an impulse purchase on a $3,000 or $4,000 item, we're going to wait six months," Heller said while shopping in Beverly Hills. If things don't rebound quickly, he added, further belt-tightening could occur "very soon."
Until the shake-up in the stock market that began as a result of lowering the credit rating of the United States, in turn resulting from the U.S. government's hesitancy in making a decision on lifting the debt ceiling, the situation in the sector of luxury goods remained positive throughout the year. Companies joyfully posted robust sales from month to month, since wealthy shoppers did not stint on designer handbags, shoes and jewelry. Luxury brands have been selling out of products even as they've raised prices. Chanel, for instance, has seen its $4,300 jumbo classic flap bag fly off shelves despite a $600 price increase in June.
Luxury stocks continued to drop further from the end of July and over the entire August; Saks has slumped 24.4%, Coach is down 18.6%, Tiffany & Co. has fallen 17.6% and Nordstrom has declined 14%.
Thus, the current situation shows how fragile and sensitive the market is to buyers’ mood. Confidence among high-income Americans fell to negative 21 for the week ended Aug. 7, according to the Bloomberg Consumer Comfort Index. This was their most pessimistic outlook about the economy, buying climate and personal finances since November 2009.
Olga Patseva, Editor in Chief of the American Bureau, Rough&Polished
