For the last several years, personal consumption has accounted for about 70 percent of gross domestic product. This decade, Americans' preternatural ability to spend has rested on the following legs: 1) the strong housing market, which allowed people to tap into home equity; 2) cheap and plentiful credit for people at every rung of the economic ladder; and 3) job growth.
As the first two legs were sawed off earlier this year, economists argued that so long as Americans had jobs and steady incomes, they'd spend and keep the economy humming. Friday morning's disappointing employment report, which shows that the economy lost payroll jobs in July for the first time in four years, indicates that a beaver is gnawing through the last leg.
So, should we fear an impending collapse in consumer spending? Recent sales figures from retailers like Wal-Mart, J.C. Penney, Dollar General, and Sears have been less than encouraging. But the huge mass retailers may not be the best indicators of overall spending. Instead, we should probably focus on the what the rich are doing. After all, the high and mighty account for a hugely disproportionate chunk of consumer activity. As Citigroup equity strategist Tobias Levkovich noted in a recent report: "The top 20 percent of American income earners spend more in a given year than the bottom three quintiles combined. Thus, they have far more influence on economic direction." Levkovich points us to the Consumer Expenditure Survey data on quintiles, which indeed shows that in 2005, the average family in the top 20 percent spent $90,469 on consumer expenditures. The average families in the bottom three quintiles spent a combined $87,139.
And how are the rich doing? Quite well, thank you. Median income has been stagnant lo these many years, as the Census Bureau reported last month, and it is still below the level of 1999. But as David Cay Johnston reported (article purchase required) in the New York Times last month, people making more than $1 million "reaped almost 47 percent of the total income gains in 2005, compared with 2000" and "received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003." Jonathan Chait's excellent new book, The Big Con, smartly argues that such outcomes are the intentional results of economic policies designed to redistribute income upward. (Few members of the Bush economic team will cop to the intent.)
In theory, the rich, and the ultra-rich, are subject to some of the same economic woes that trouble the middle class: the slumping housing market, the rising cost of credit, and job insecurity. But they aren't showing many signs of stress. Some hedge funds have imploded, and a few investment bankers have lost their jobs, but financial-services job losses have thus far been contained to the rank-and-file employees of subprime lenders. Bonuses at Wall Street may be down this year, but many investment bankers are clearly still spending last year's haul.
At Saks, same-store sales in August were up a stunning 18.2 percent; at Tiffany, same-store U.S. sales rose 17 percent in the second quarter. Indeed, luxury retailers are in an expansive mood. The Wall Street Journal reported earlier this week (subscription required) that "this year, some 30 high-end retailers have opened boutiques in Austin [Texas], including Tiffany & Co., Michael Kors, Ralph Lauren, David Yurman, Louis Vuitton and Burberry." These stores are located in a new mall anchored by Neiman Marcus, where same-store sales rose a healthy 4.6 percent in August. Among the strongest performers: "designer handbags, shoes, designer jewelry, women's fine apparel, and men's."
Nationwide, the housing sales market may be a bust. But the Journal reports (subscription required) Friday morning that while many California housing markets suffer, "[e]ye-popping sales are spreading along a 40-mile stretch of southern Santa Barbara County." In July, sales in the area, "the only region of California where the median sales prices surpassed $1 million," rose nearly 28 percent. Publicly held home builders that cater to middle-class buyers are faring poorly. But the very wealthy are still building. This 50,000-square-foot home under construction in West Hartford, Ct., is worth 20 starter homes—and probably more, given the amenities. Or take personal transport. While auto sales are down, "the market for private jets is stronger than it has ever been," said Richard Aboulafia, analyst at the Teal Group. Economically speaking, a Gulfstream G550, which is made in the United States and goes for $48 million, is worth the equivalent of 3,200 Ford Focus coupes, which go for about $15,000 each.
Given the top-heaviness of the economy, one could make the case—one could, but I'm not—that the continuing upward redistribution of income is good for the economy and good for all of us. As they earn more, and keep more of their income, the rich and the very rich spend more, thus keeping the growing number of residents of Richistangainfully employed. The fact that the rich are getting richer is one of the reasons that federal tax revenues—which are much less progressive than they were in 2000 but still somewhat progressive—are growing so smartly, up 7.4 percent year over year. Today, analysts are likely sifting through the jobs report and ratcheting down their forecasts for the Christmas season. It may well turn out to be a glum one for many retailers. But as long as the lights are on in the mansion on the top of the hill, the growing number of stores and businesses that cater to their residents will be busy.