Trickling Out

While the growing divide between rich and poor will likely cause problems down the road, it doesn't take away from the fact that spending by the rich tends to have an out-sized impact on the economy as a whole. In "Belt-Tightening Among Wealthy Shoppers Could Choke Other Households" the Associated Press details how those who apparently have money to spend are beginning to cut back.

Lower-income workers are dependent on their business and tips.

It's hard to feel sorry for well-heeled shoppers whose idea of tough economic times is passing on $1,000 Burberry raincoats or that $300 limo ride while the working poor skimp on vegetables and take the bus.

But economists say that recent signs of cutting back by the affluent could hurt the 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 40 percent to about $1,800 since late last year. His work week at Newport Beach-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 resident. "I am eating more cereal and am not buying clothing."

He used to go eat at restaurants like Memphis Café and Mimi's Café a couple times a week. No longer. He also would like to visit friends in San Diego and Los Angeles. But less work and expensive gas are making him put off those trips.

And he normally gets haircuts every two months. He has to "keep up appearances" as a limo driver. But the last time he got a haircut was about four months ago.

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

Niemira expects the retail sector, whose growth was fueled in part by strong gains at luxury chains, will struggle to eke out a 1 percentage sales increase in stores opened at least a year during the next few months. That's below the 2.1 percent average for 2007 and 3.7 percent for 2006.

Just look at the cutbacks by Dali Wiederhoft, a 52-year-old marketing executive from Reno, Nev., made skittish by a volatile stock market, a 20 percent decline in her home value and recession fears.

Over the past three months Wiederhoft pared her spending on clothes to $500 per month from about $3,000; that means no more Jimmy Choo shoes and David Yurman jewelry. Her cutbacks also included canceling the services of a cleaning woman and a lawn care company. She also plans to trade in her BMW for a Ford when her lease expires in about a month.

"This is a time to have cash, not to spend. So, I'm cutting wherever I can," she said.

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 percent decline in same-store sales at its North American stores for the second quarter ended Dec. 29, 2007 and Compagnie Financire 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.

American Express Co., whose customers are generally affluent, said it expects slower spending and more missed payments on credit cards throughout 2008.

The economy needs affluent shoppers to spend with enthusiasm. According to the government's latest survey of consumer expenditures, the top 20 percent of households spend about $94,000 annually, almost five times the bottom 20 percent and more per year than the bottom sixty percent combined.

Then there's also the multiplier effect. 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 percent sales dip this January vs. the same month last year, according to general manager Jason Lattier. The 13-year-old business started seeing a slowdown last November when sales dropped 15 percent vs. the same month the year before. That 15 percent decrease was the worst monthly drop in about four years, he said.

"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.

While its corporate business remains the same, individuals are hiring the limo company less for weddings, birthdays and bachelor and bachelorette parties, he said.

"People are holding onto their money or maybe they don't have the funds like they used to," Lattier said. "I'm not sure."

Comments

[c]

$500 a month on clothes? And it was $3000? Who needs a clothes budget that big? Does she need new clothes to wear for work every day? Does she really think that anyone will remember that she wore a certain skirt or top before? And who cares if she did? I want to go to her garage sales.

[farang]

1. Nice to see the subtle attempt at justifying "trickle down" bs.

2. It's also nice to see where the tax cuts for the wealthy actually lead: not to "job creation" but to a poor 52 year old women 'cutting back" to $500/month clothes purchases, from $3000.

I'm 52, so I gotta say: WTF, Woman????? $3000 a month????

Reinstate the tax code of 2000 NOW.