February 3, 2008
Rich feeling the squeeze
Belt-tightening by the wealthy could hurt blue-collar workers who rely on big tips and sales commissions.
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NEW YORK -
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 firsthand: He has seen his
monthly wages drop by 40 percent to about $1,800 since late last year.
His work week at Newport Beach, Calif.-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, Calif. resident. "I am eating more cereal and am not
buying clothing."
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 percent
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 she 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 in North
America for the second quarter ended Dec. 29, 2007 and Compagnie
FinanciGere 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 60 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 on 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 dip in business last
year, according to general manager Jason Lattier.
In Chicago,
Montopoli Custom Clothiers, a tailor to consumers willing to spend
$3,000 to $30,000 for a custom-made suit, has also seen business
suffer. Sales dropped 10 percent in October and November from the
year-ago period, according to president Jeff Landis. He noted that 20
percent of his clients, who include commodity traders and CEOs of
Fortune 500 companies, delayed buying suits for fall.
"I
consider them a leading economic indicator," said Landis. He's taken
more aggressive measures like increasing calls to clients to get them
in the store, but hasn't laid off anyone. "I'm not at the point of
panic," he said.
A potential economic ripple effect
What it is
When the rich cut back on their spending, it can have a ripple effect on lower-income workers who rely on the wealthy for big tips and commissions.
Big spenders: American households that make more than $150,000 a year account for 40 percent of all consumer spending; this is two-thirds of economic activity.
Economic reliance: The economy relies on these big spenders. The top 20 percent of households spend about $94,000 a year. This is five times as much as the lower 20 percent and more than all the bottom 60 percent combined.Possible effects on you
Service workers: Big spenders tend to be big tippers, so tips might shrink.
Sales people: Employees at upscale stores dependent on commissions could see their paychecks shrink.The outlook
Superwealth factor: The superwealthy, those worth in excess of $10 million, continue to spend heavily, but that could change if the economy continues to slip.
Financial meltdown: Big financial sector layoffs could lead the rich to moderate their spending.
Bottom line: Those who rely on big spenders might have to find a supplemental or new job to cover their own needs.
Source: The Associated Press
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Copyright © 2008, Newport News, Va., Daily Press
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