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Why luxury brands are booming, even though the economy is not

Rick Newman
Daily Ticker

Here’s one part of the economy you don’t have to worry about: luxury car sales.

The auto industry has gradually recovered from the wipeout that occurred in 2009, when sales plummeted. But the luxury segment has left most mainstream models in the dust.

Mercedes, BMW and Audi all notched record U.S. sales in 2013. The same pace continues this year, so far.

“There are a lot of people out there who can afford luxury goods,” Steve Cannon, president and CEO of Mercedes-Benz USA, tells me in the video above. “The wealth that has really been there, but been planted on the sidelines, is finding its way into the market.”

Cannon says three factors are fueling the boom in luxury goods. First is the stock market, which is jittery this year but still up 17% during the last 12 months and 114% during the last five years. The housing recovery, though incomplete, has helped many home owners regain much of the equity lost during the housing bust. And with an overall improvement in the economy, consumers are feeling more confident and more willing to spend.

It goes without saying that this “recovery” is far from universal. The total amount of household wealth in the United States hit a new high of $80.7 trillion at the end of 2013, according to the Federal Reserve. But that wealth is skewed more heavily to the affluent than before the recession that ran from 2007 to 2009.

The biggest gain has been in financial assets, thanks to a stock-market rally fueled at least in part by favorable Federal Reserve policies. Housing wealth, more common among the middle class than stock-market investments, hasn’t recovered nearly as much. And many people, needless to say, have neither real estate nor financial wealth, making them unlikely to show up at a Mercedes dealership any time soon.

Mid-market retailers such as Walmart (WMT), J.C. Penney (JCP) and Target (TGT) are struggling along with the middle class, with weak sales growth and iffy profit projections. Luxury purveyors are obviously somewhat insulated from woes affecting the middle class—but they still need a steady stream of new customers in order to keep growing. In that regard, even the high-spender economy is vulnerable to stagnation in many sectors and even to the elevated number of long-term unemployed who have been out of work for six months or longer. Such people may never buy a Mercedes sedan or a Gucci handbag, but they contribute to economic growth if they’re working—and detract from it if they’re not.

For automakers, another concern is the empty wallets of younger Americans, along with what seems to be a waning interest in cars. Mercedes feels it has solved that problem, largely on account of the popular CLA sedan that debuted last year (starting price, $29,900) and the similar GLA crossover that will go on sale this year.

“We’ve been building bridges to the millennials for a couple of years now,” says Cannon. “We finally have product that can attract them.”

Every other automaker, of course, is aggressively courting the same twentysomethings, who may have to support the nation’s consumer economy with less wealth at their disposal than prior generations. More wealth for the masses is in everybody’s interest.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.