Cut Back in Spending by Wealthy Consumers Creates Ripple Effect

Posted on January 30, 2008 by LCT Staff - Also by this author - About the author

NEW YORK CITY — Economists say that recent signs of cutting back by the affluent could hurt the U.S. economy and deliver even more pain to lower-income workers, who are dependent on their business and fat tips.

Nathan Warren, a limo driver, knows this first hand: He has seen his monthly wages drop by 4%, to about $1,800 since late last year. His work week at Newport Beach, Calif.-based Classy Ride Limousine Service was reduced to three days from five amid slow business.

"I have to struggle to get by. I am pinching pennies," said Warren, 30, a Costa Mesa, Calif. resident. "I am eating more cereal and am not buying clothing."

Cutbacks by the wealthy have a ripple effect across all consumer spending, said Michael Niemira, chief economist at the International Council of Shopping Centers. That's because American households in the top 20% by income — those making at least $150,000 a year — account for about 40% of overall consumer spending, which makes up two-thirds of economic activity.

Such reined-in spending seems to be the end of a winning streak for luxury retailers that once appeared immune to the economic slowdown. Tiffany & Co. and Williams-Sonoma Inc. both reduced their earnings outlooks and Burberry PLC said it may miss its 2008 profit forecast. Coach Inc. reported a 1.1% decline in same-store sales at its North American stores for the second quarter ended Dec. 29, 2007 and Compagnie Financiere Richemont SA, the Swiss parent of Cartier and Baume & Mercier, reported a slowdown in holiday sales growth.

Soaring home values had made upper-middle class shoppers feel wealthy in recent years, causing them to trade up to $500 Coach handbags and $1,000 espresso makers, but a housing slump has wiped away their paper wealth. The woes are creeping into even the high-end luxury sector, as affluent shoppers are rattled by the turbulence in the financial markets.

When shoppers splurge on $1,000 dinners and $300 limousine rides, that means fatter tips for the waiter and the driver. Sales clerks at upscale stores, who typically earn sales commissions, also depend on spending sprees of mink coats and jewelry. But the trickling down is starting to dry up, threatening to hurt a broad base of low-paid workers like Warren, the limo driver.

Classy Ride Limousine Service, which caters to clients with an average household income of $200,000, has suffered a 10% dip in business last year, according to general manager Jason Lattier.

"We've been really slow," said Lattier, noting that 12 out of his 20 drivers are now working three days per week. With the average driver earnings $150 a day in tips and wages, that means a weekly shortfall of $300.

Overall, the super wealthy — consumers with a net worth of more than $10 million — are still splurging on $1 million boats, $10 million diamond jewelry, and other luxuries, according to Milton Pedraza, chief executive of the Luxury Institute, a research institute based in New York.

But this crowd could stop splurging, simply because they're not in the mood. That happened right after the Sept. 11, 2001 terrorist attacks, though luxury spending rebounded soon after.

Meanwhile, Warren, the California limo driver is focusing on day-to-day survival. Faced with a monthly rent of $1,300, he has no choice but look for a full-time job. He's had training as a machinist before, but now things are too unsettled.

"There is so much uncertainty in the economy from what I see, so I am not sure where I am going to look," he said.

SOURCE: The Canadian Press

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