A few years ago, Alesia Peterke of Pleasanton, California, thought nothing of plunking down $275 for a Coach handbag.
“I would have wanted to keep up with the Joneses,” Peterke, 52, says.
Now, she buys $60 purses that last just as long, hunts for bargains and prefers to spend money on experiences that create lifelong memories, such as trips to see relatives.
“As a family, we have the things we need and want,” Peterke says. “We will continue to spend, but we are smarter consumers expecting high quality for our money.”
Higher-income Americans are reining in their spending for myriad reasons, including a volatile stock market, shoppers’ fatigue, the new tax law and modest wage increases. The trend is noteworthy because the top 10% of households by income make up nearly half of all consumption.
Overall consumer spending growth, in turn, is slowing at a critical period for the economy. Many analysts are looking to households to prop up growth as business investment slumps amid a trade war that poses the risk of a recession by next year.
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Spending by the top 10% fell 1% in the second quarter from the same period last year, according to an analysis of Federal Reserve data by Moody’s Analytics. And a four-quarter average of outlays by the high earners has slipped on an annual basis the past three quarters, marking the first such declines since the Great Recession of 2007-09.
“High-income consumers have been the Atlas holding up the U.S. and global economies,” says Mark Zandi, chief economist at Moody’s analytics. “But they appear tired, and if they founder, so too will the economic expansion.”
Consumer spending more broadly is still growing solidly, but at a slower pace. Household outlays increased 2.9% at an annual rate in the third quarter, down from a robust 4.6% early in the year. Capital Economics expects purchases to increase by 2% to 2.5% in the current quarter.
The downshift for affluent Americans is highlighted by the mixed performance of some luxury brands.
Tiffany’s revenue in the Americas fell 4% in the second quarter. Luxury sales more generally have continued to grow but largely because of an emerging crop of wealthy Chinese shoppers and “aspirational” middle-class Americans who seek the status of luxury brands, says Marie Driscoll, managing director of luxury and fashion for Coresight Research. Luxury spending by affluent households has been flat, she says.
Here’s a look at why well-heeled shoppers are pulling back:
The stock market
The Standard & Poor’s 500 index hit a record high recently, but stocks have been volatile and, following the big sell-off late last year, the broad index is up just 6.2% since September 2018.
The top fifth earning households make up about 90% of individual and mutual fund equity investments, Moody’s says. Typically, every dollar increase in wealth boosts spending by 2.5 cents, Zandi says. The sideways moving market, however, means such wealth effects have been subdued.
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An increase in house prices can similarly make homeowners feel wealthier and spend more. But prices of the top third, most expensive homes rose just 3.1% in October from a year earlier, compared with a 4.7% increase for mid-price houses and 5.8% for entry-level units, which have the lowest supplies, according to real estate research firm Zillow. Luxury homes, priced at $1.5 million or higher, saw prices rise just 1% annually in the 12 months ending in the second quarter. That's because inventory jumped 18.7% and sales fell 4.6%, according to real estate brokerage Redfin.
Wealthier households have bigger salaries, but they’re rising more slowly. Pay for the top fourth of income-earning households rose 3% annually in October, compared with about 4% for the bottom half of households, according to the Federal Reserve Bank of Atlanta.
A Goldman Sachs study earlier this year found that wages for low-paid employees have been bolstered by worker shortages resulting from the low unemployment rate. Meanwhile, higher-income wage growth is more sensitive to corporate profits, which have fallen this year.
The new tax law
Although the tax overhaul Congress passed in late 2017 lowered rates for wealthier Americans, it also eliminated key deductions. The deduction for state and local taxes was capped at $10,000, and the mortgage interest deduction was limited to home values up to $750,000, down from $1 million.
Although Peterke and her husband were left with more take-home pay in 2018 as the amount withheld for taxes dropped, they had a bigger tax bill in April because they lost several thousand dollars in deductions.
Changing fashion tastes
Wealthy Americans are buying fewer suits and other formal clothing, in part because of the work-at-home trend, Driscoll says. Instead, they’re snapping up chic sweatshirts and other comfortable outfits that may cost more than $1,000 but are still less expensive than a designer suit or dress, she says.
Some high-income Americans have bought most of what they need during the healthy economy of recent years.
”They’re taking a rest,” Zandi says.
Girding for retirement
A fast-growing number of affluent baby boomers are cutting spending and beefing up their nest eggs as they approach retirement. Boomers saved 17.7% of their income in the second quarter, up from 12.3% a year earlier, Moody’s data show.
Carole Dempsey, 58, of New Bern North Carolina, says she and her husband have stopped taking vacations and eating out and decided to forgo the addition of a screened-in porch as they bolster their savings in anticipation of retirement in four years.
“We don’t think the market is going to hold,” she says, adding they’ve been more cautious since President Donald Trump’s election created more uncertainty. “We have no confidence in the stability of the economy.” And if Social Security and Medicare are scaled back, “You may have nothing.”
This article originally appeared on USA TODAY: US consumer spending: High-income households are pulling back.