Consumer spending has been the engine of US GDP for decades. The difference between a soft and a hard landing of the economy lies in large part with the wealthiest Americans and their purchasing decisions. And the companies that respond to changing buying habits will weather the storm best.
That writes Barron’s.
Money keeps rolling in lean times
It’s not just bad news. According to Doug Kelly (Williams Jones Wealth Management), consumers will have a little harder time, but that’s not a disaster. Consumers in the higher segment are in pretty good shape.
In the US, the top 20% of households account for nearly 40% of all consumer spending, or 28% of gross domestic product. They have an income of more than $176,000 a year after taxes and can weather economic recessions more easily.
History shows that in the 1990s, households with the highest incomes reduced their annual spending less than consumers in general. This richer topping didn’t even flinch during the dotcom bubble. The 2007-2009 recession, when both the stock market and house prices fell, was the only period of prolonged decline in average spending among this wealthy upper class.
Rich top layer makes the difference
The spending patterns of the top 20% can in some ways mean the difference between a short and a long recession. Inflation is now at levels not seen in four decades. However, the wealthy upper class is not completely immune to inflationary pressures.
According to recent research by Willis Towers Watson, 36% of Americans live on a six-figure income paycheck to paycheck, as do 30% of those earning $250,000 a year. In addition, they may be more inclined to cut spending before it becomes absolutely necessary to do so.
They are people who have been able to accumulate their wealth by making good financial decisions, and it is a good financial decision to tighten your belts in times when the cost of living rises dramatically, says Jon Ekoniak (Bordeaux Wealth Advisors).
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This recession is different from the Great Recession
This wealthy upper class, which owns about 74% of financial assets and 54% of non-financial assets (such as homes), has a buffer of nearly $60,000 in additional liquid assets per household, according to data from the Federal Reserve and Morgan. stanley.
With the tight supply, it is unlikely that house prices will fall drastically, Ekoniak thinks. That makes it different from during the Great Recession. A short-term recession will look more like 2001 than 2008 for high-income Americans. The strong labor market also offers hope. If this wealthy upper echelon can stay at work, she’ll feel relatively nervous, but fine.
Spending pattern does change
The wealthier upper class seems willing to continue to spend money. That probably limits the severity of an economic downturn. However, their spending pattern may change compared to recent years.
Travel and vacations seem to be here to stay for wealthy Americans. Christie Hudson (Expedia) expects this trend to continue to grow as we move into the summer and thinks 2023 will be a record year. Mel Dohmen (Hotels.com) sees signs of strong demand after the summer months.
Preference for experiences over stuff
Stephanie Linnartz of Marriott International sees that people would rather spend money on experiences than on stuff. That seems to be confirmed by retailers’ earnings revisions, with companies across the spectrum warning that Americans are buying less than they did during the pandemic.
That difference is also apparent on Wall Street, where shares of companies such as Marriott appear attractive and retailers are seeing the tailwind of corona fade. Nordstrom’s latest quarterly results show consumers becoming increasingly frugal higher up the income spectrum. After the first quarter, Nordstrom raised its full-year forecast, but had to reverse it just a quarter later.
Macy’s says demand for high-end products was still strong, even as it lowered its full-year guidance due to macro headwinds. The poor results of the more luxurious consignment company RealReal also show that sellers in the higher segment are having a harder time.
These results indicate that some upper-middle-class Americans are more cautious, even though the upper class continues to spend freely. That group could help some luxury goods sellers reverse the trend.
Will China bring a solution?
Estee Lauder is an old favorite of Barron’s. Stocks still look attractive on several fronts as makeup sales pick up, international markets reopen and stocks are cheap. Kelly also owns shares of Estee Lauder. Estee Lauder generates more than a third of its sales in China, a growth market that is still in its infancy. There could be tailwinds from China if travel restrictions are lifted, real estate holds its value and consumer spending resumes.
The same day Walmart lowered its forecast, LVMH (Moët Hennessy Louis Vuitton) with robust second quarter figures. In China, the company is not yet performing very well, such as Hermès International. That lowers LVMH’s valuation, but its strong US and European position more than offsets the company’s weak Asian operations and LVMH has one of the highest returns on equity.
The ultra-rich happily order their Ferraris
Recent robust gains from Ferrari are another indication that the purchasing appetite of the ultra-rich has not yet diminished. The shares are trading for 36 times expected earnings, just below their historical average. Ferrari’s customers are in a different echelon, one that, for the most part, walked quietly through the 2007-2009 recession and could now also be less affected by a milder downturn.
Love for shopping hasn’t cooled down yet
Ultimately, economic risks will increase in the second half of 2022 and factors such as interest rates and the housing market will play a role in whether the wealthy upper class will continue to spend money at a time when inflation remains at historically high levels.
The labor market and housing market data so far give hope. A less dramatic downturn should allow financially secure consumers to recover more quickly, while the wealthiest continue their spending unabated. After all, Americans’ love of shopping has seen it through thick and thin, pandemic and health.
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