Welcome to the 'Trading Down' Economy

One of the unfortunate side effects of the era of easy money was a widespread and growing acceptance of a distorted sense of economic reality.

Aided by the almost limitless availability of seemingly low-cost credit, it wasn't hard to convice many Americans to believe in the storyline -- actively promoted by retailers, banks, media companies, and other short-term beneficiaries of unsustainable consumer spending habits -- that the American dream was there for the taking, no matter what your current circumstances.

In some ways, it was almost as if people had gotten ensnared in some sort of personal development cult, where the high priests of overspending chipped away at such quaint notions as "living within your means" and "saving for a rainy day" and replaced them with exciting new mantras that conveyed a false sense of fiscal invincibility.

Now, though, circumstances are changing and prudence is back in vogue. As the New York Times' Michael Barbaro reports, people are "Thinking Twice About That $400 Handbag."

It was a retail juggernaut that swept through America’s shopping malls and bedroom closets, rewriting the rules of class and consumption.

But affordable luxury is not looking so affordable — or sustainable — anymore.

During the 2007 holiday shopping season, the middle-class consumers who spent the last decade splurging on $300 saucepans and $600 scarves, tightened their purse strings in the face of slipping home prices and rising energy costs.

As a result, an entire economy built around aspiration is starting to collapse. Affordable luxury purveyors like Tiffany & Company, Nordstrom and Coach have experienced slowing sales and plunging stock prices, problems likely to deepen after the stock market’s continued slide last week reinforced fears of a recession.

But one of the biggest casualties may be the illusion of wealth that millions of Americans enjoyed for years, one Burberry trench coat at a time.

“You had a lot of people who graduated to a level of consumption they could not really afford,” said Adrianne Shapira, a retail analyst at Goldman Sachs. “Two-hundred-dollar pairs of denim were plausible when home values soared, but now $100 jeans are looking more reasonable.”

The phenomenon earned many nicknames — mass affluence, new luxury, masstige — and was best summarized by the retail experts Michael J. Silverstein and Neil Fiske in their 2003 book, “Trading Up: The New American Luxury.”

They posited that Americans with household incomes of $50,000 and above tend to “trade up” to high-end products in categories like kitchen appliances or bedding that are emotionally important to them, while perhaps pinching pennies elsewhere to compensate.

Dozens of chains rode this masstige wave, and earned billions in the process. Coach persuaded women to buy $400 handbags when a $60 version from Macy’s could have sufficed. Williams-Sonoma trained shoppers to covet a $35 stainless-steel hand-crank can opener, even though Wal-Mart sells a high-quality electric model for less than half the price. And 7 for All Mankind convinced people that they wanted a $200 pair of jeans made from the same material in a $30 pair of Wranglers.

But trading up was always a fragile phenomenon. It rested, in large part, on consumer psychology — a feeling of wealth derived from soaring home values and the steady growth of real income, that is, income adjusted for inflation.

Today, any growth in real income is all but canceled out in consumers’ minds by falling home prices and rising energy costs. Michael J. Kowalski, the chief executive of Tiffany, calls this “the wealth affect.”

Even if people have plenty of money on paper, he said, they suddenly feel less rich. “It is a reaction to the general economic uncertainty that everyone is feeling,” Mr. Kowalski said.

At Tiffany, the wealth effect translated into sluggish holiday sales of jewelry priced between $1,000 and $10,000, items aimed at what the chain calls its “midtier luxury consumer.”

Stephen I. Sadove, the chief executive of Saks Fifth Avenue, observed the same pullback in December. “The customer who aspires to luxury is slowing down,” he said. “But the high end of luxury retailing remains strong.”

So what will become of masstige if the economy actually tips into a full-blown recession?

Trading down, of course. Experts predict Americans will now grudgingly shift to cheaper brands for much of their shopping. For his part, Mr. Silverstein, the grandfather of trading up, is confident that consumers will pay a premium for the products that matter most to them.

“The trading up phenomenon is quite recession-proof,” Mr. Silverstein said. “It might slow. But it’s way too early to say it’s over.”

Although it might be "recession-proof," I have no doubt that the "trading up phenomenon" won't be depression-proof.

Comments

[Deborah]

“You had a lot of people who graduated to a level of consumption they could not really afford,” said Adrianne Shapira, a retail analyst at Goldman Sachs. “Two-hundred-dollar pairs of denim were plausible when home values soared, but now $100 jeans are looking more reasonable.”

Excuse me? This statement screams of the gross excess that is still clearly there. I saw $200 denim but never considered them for middle class America, yet who ever wrote this clearly did. In my books the $100 denim was luxury and the $20-60 denim was affordable. For the record, over xmas I got two pairs of $30 denim.

[roger pasa]

most if not all Americans get their economic education from consumer catalogs&TV adds & really believe they can get $200 value for $15,what they dont reallize is that things dont change value only the medium of exchange (money)gains or looses value by manupilation

[Tim]

Deborah - 7 For All Mankind, Citizens of Humanity -- those are about $180 a pair at Nordy's and that's what my DD has to have. That's what her friends have. Also, a Coach purse. We are not wealthy, but a cell phone with built-in camera to send photos back and forth, an iPod, laptop, etc -- those are what JR High girls seem to consider bare necessities in Greenwood Village, CO. Luckily for the parents, quality (the right brands) seem to suffice over quantity, so between birthdays and Christmas said DD gets enough loot from parents and relatives to keep up with her Jr. High Joneses :)

[Lady From Middle America]

Deborah - You Go Girl!

Coach handbags were never in my cards. My middle-class income goes almostly exclusively to mortgage payments, taxes, groceries, gasoline, gifts for relatives, health insurance, medical care (hardly any of which is paid for by my health insurance), other insurance, car repairs and the occasional modest home improvement project. Anything resembling something that's even remotely extravagent (modestly priced shoes and clothing) is paid mostly by birthday and holiday gift cards.

It sounds like Deborah and I could write a book about economizing.

[farang]

[In some ways, it was almost as if people had gotten ensnared in some sort of personal development cult, where the high priests of overspending chipped away at such quaint notions as "living within your means" and "saving for a rainy day" and replaced them with exciting new mantras that conveyed a false sense of fiscal invincibility.]

Thank you.

It is amazing how many folks truly still believe you can reduce your income (tax cuts), increase your spending (borrowing), and expect the economy to go on autopilot upward forever.

But now, I look around, and think even the tiny bit of cash I was able to save, and convert to non-US Dollar-based assets, will serve me well into my looming retirement.

In a related note, those wondering if this administration was aware of the consequences of it's policies: See Cheney converts US Dollar based assets to Euro...........

[Kate]

I want to know why it is so difficult for Americans to be happy without this ridiculous cult of consumption. Somebody needs to teach these people how to enjoy life, and how to keep their money (Hint: not by buying McMansions). I'm considered "high net-worth" by these ad agencies but I spend like I'm lower middle-class-- and I still have fun. Come on people, it's not that hard!