-ggg---Slowing Economy Proves Fitzgerald Wrong: Rich Aren't Different
bloomberg.com
By Matthew Benjamin and Rich Miller
Nov. 19 (Bloomberg) -- F. Scott Fitzgerald had it wrong: In a slowing economy, the rich aren't that different from everyone else.
Affluent consumers, pinched by shrinking stock portfolios, falling property values and smaller bonuses, are behaving like their less-well-off peers: They're reining in spending.
That portends a steeper slowdown than originally forecast for the U.S. economy, or even a recession, because the richest fifth of American households accounts for almost 40 percent of consumer spending, the main engine of economic growth.
``Upper-income consumers are the bellwether,'' says Joseph Brusuelas, chief U.S. economist at IDEAglobal Inc., a Singapore- based research firm that advises central banks. ``When they begin to capitulate, that's when we all head down.''
Lower-income shoppers cut spending earlier this year as gasoline prices soared above $3 a gallon and higher payments on adjustable-rate mortgages forced some homeowners into default.
Now, the slumping stock and real-estate prices that followed have attracted the attention of the more-affluent -- which might have surprised Fitzgerald, who wrote in his 1926 short story ``The Rich Boy'' that the very rich ``are different from you and me.''
Confidence among these consumers dropped in the third quarter to its lowest level since 2004, according to Unity Marketing, a research firm in Stevens, Pennsylvania.
Sales Growth
Sales growth at high-end retailers, running at annual rates above 10 percent early this year, slowed in the last three months and dropped to 3.3 percent in October, says the International Council of Shopping Centers.
Sales of luxury goods excluding jewelry rose 5.7 percent in October over a year ago, down from 8.5 percent the previous month, according to SpendingPulse, a sales measure compiled by MasterCard Advisors, a unit of MasterCard Inc. SpendingPulse is based on aggregate sales activity, not MasterCard's financial performance.
``Business is not like it was before,'' says Marc Engel, president of Chasalla Fashions, whose Chicago store sells clothing and accessories by Versace, Hugo Boss and Jean Paul Gaultier. ``The money is not so loose in people's pockets. But it's still OK.''
Among brands cutting profit forecasts are Polo Ralph Lauren Corp., designer of Chaps and Club Monaco clothing, and Coach Inc., the largest U.S. maker of luxury leather goods. Both are based in New York.
`Disappointing'
It's ``disappointing that the overall consumer slowdown appears to be hitting this high-quality retailer, too,'' says Patricia Edwards, who helps manage $13.4 billion, including Coach shares, at Wentworth, Hauser & Violich in Seattle.
Economic pressures are even keeping diners out of expensive restaurants, according to McCormick & Schmick's Seafood Restaurants Inc. On Nov. 7, the Portland, Oregon-based chain reported earnings below analysts' estimates.
A slowdown in discretionary spending is raising the possibility that Harley-Davidson Inc., maker of the Fat Boy and Road King motorcycles, may post its first annual profit decline in 14 years. Third-quarter revenue at the Milwaukee-based company dropped 5.8 percent and net income fell 15.3 percent.
``Nobody needs a Harley-Davidson, and frankly, they've held up better than you might have expected,' says Ron Muhlenkamp, whose Muhlenkamp Fund in Wexford, Pennsylvania, holds about 400,000 Harley-Davidson shares.
Nordstrom's Surprise
One of the biggest surprises came from Seattle-based department-store chain Nordstrom Inc., which reported a 2.4 percent decline in October same-store sales instead of the 1.1 percent increase analysts expected.
``A big red flag went up with Nordstrom,'' says IDEAglobal's Brusuelas, who is based in New York and visits Nordstrom and Saks Inc. stores to gauge the mood of affluent consumers. ``That has a lot of people worried about what we're going to see in the fourth quarter.''
With the traditional start of U.S. holiday shopping this week, the National Retail Federation foresees the smallest sales gain for the season in five years. In anticipation of weak demand, Bentonville, Arkansas-based Wal-Mart Stores Inc., the world's largest retailer, began offering holiday discounts two weeks early.
``The perfect storm is coming at the absolute wrong time,'' says Marshal Cohen, chief industry analyst at NPD Group Inc., a retail consultant in Port Washington, New York.
Deepening Slump
The consumer polls and reports from upscale retailers already are leading some analysts to forecast a deepening slump. According to a Bloomberg survey of economists, growth in consumer spending will slow to a 2 percent annual rate in the fourth quarter from 3 percent last quarter. The economy will grow at a 1.5 percent rate, less than half the reported 3.9 percent third-quarter pace, the survey shows.
Some economists say it would be premature to count the American consumer out. Spending will still increase this year, though likely at a slower pace, says Ethan Harris, chief U.S. economist at Lehman Brothers in New York. ``Consumers have proved remarkably resilient over the years,'' he says.
There's not much belt-tightening at the very top of the wealth scale. Sotheby's, for example, held its biggest auction ever on Nov. 14, selling $315.9 million of contemporary art only one week after a disappointing sale knocked the New York auction house's shares down 28 percent in a day.
The Super-Rich
Brands that cater to the super-rich, such as Hermes, Harry Winston and Van Cleef & Arpels, will outperform names like Coach, Burberry and Tiffany, which aim further down the income scale, says Claudia D'Arpizio, a consultant on the luxury market and partner at Bain & Co. in Milan.
She expects growth among high-end retailers to slow to an average pace of 5 percent during the next four years, compared with 8 percent in 2006 and 2007, with the impact most evident in ``the accessible market.''
Milton Pedraza, chief executive of the Luxury Institute, a New York-based consumer-research firm, calls this segment ``the mass affluent.'' Those households, with income levels roughly between $100,000 and $300,000, will pull back the most, he says.
That comes after five years in which the net worth of U.S. households ballooned by $19 trillion to $58 trillion, with most of the increase coming from financial assets, according to Federal Reserve figures.
Reason for Pause
``Some of this may simply be the fact that the stock market has pulled back and may be giving some of the well-heeled reason for pause,'' says Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc.
Part of the pain originated on Wall Street with the proliferation of securities backed by subprime mortgages. Before his ouster this month, former Citigroup Chairman Charles Prince vowed to eliminate or reassign more than 26,500 jobs. Lehman Brothers Holdings Inc. in August closed its subprime-lending unit and announced 1,200 layoffs.
Financial-industry bonuses will decline as profits at securities firms shrink, according to a report by the New York State Comptroller.
Sales of luxury goods ``suffer, in a way that regular retail doesn't, from what happens in the financial markets,'' says Kamalesh Rao, director of economic research at MasterCard Advisors.
The longer oil prices remain elevated, while home and equity prices tumble, the more the rich will act like everyone else. ``Historically we've counted on the high-end consumer to drive the economy forward,'' says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. ``If they pull back, the economy will unravel into recession.'' |
