Is the Long-Awaited Consumer Slowdown Beginning? Part III – The Affluent Consumer is Trimming Back on Consumption

The more affluent consumers are beginning to slow their purchases. Text in bold is my emphasis. From Bloomberg:

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.

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. . . . .

. . . . . 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.''

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.

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.''