The economic recovery has been helped in large part by the spending of the most affluent. Now, even the rich appear to be tightening their belts.
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Saving vs. SpendingLate last year, the highest-income households started spending more confidently, while other consumers held back. But their confidence has since ebbed, according to retail sales reports and some economic analysis.
“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.
That cautious attitude stems in part from concerns about global instability, especially in Europe, and in part from the volatility of the stock market in recent months. Major stock indexes fell sharply on Friday, after several big companies announced disappointing earnings. Bank stocks were the biggest losers as investors wrestled with the twin issues of lower trading profits from Citibank and Bank of America and the prospect that new financial regulation would further crimp their businesses.
Though stock performance has a bigger psychological and financial impact on high-income households, consumers of all income levels are fretting more about their financial future, perhaps bracing for the possibility of another economic contraction. Consumer confidence slumped in July to its lowest point since August 2009 in the Thomson Reuters/University of Michigan index released on Friday.
The Dow Jones industrial average slipped 261.41 points to 10,097.9 on Friday, for a loss of 2.52 percent. For the year, broad-based stock indexes in the United States all show losses of more than 3 percent.
Even Federal Reserve policy makers have acknowledged that the recovery is losing steam and suggested that should conditions worsen further, 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. 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.
Although real estate brokers in Manhattan and the Hamptons report that buyers at the high end have returned, and Mercedes sales in the United States are up 26 percent this year, other indicators suggest a slowdown.
At the high end, luxury hotel chains like the Four Seasons and Ritz Carlton said bookings were much stronger earlier this year but had recently slowed. And upscale retailers, including Saks and Neiman Marcus, said sales growth eased in June. Overall retail sales slid in June from May, the government said 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 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 was 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 last year for those in middle-income brackets as they cut 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 to 9.5 percent over all, 18.2 percent in construction and 12.1 percent in production.
