Stock decline may hurt upscale retail

Posted: August 14, 2011

The stock market's 13 percent plunge since July 22 may mean lower sales for high-end retailers such as Tiffany & Co. and Neiman Marcus Group Inc.

The shopping habits of Americans who make more than $100,000 a year are tied to the positive wealth effect of rising shares, so the decline in recent weeks likely will hurt high-income consumers and the U.S. expansion, according to Robert Dye, chief economist at Comerica Bank and formerly of PNC Bank.

Their spending "has been a driving force for the economy in this recovery and the recent selloff of equities is a fundamental threat to that," said Dye, who is based in Dallas.

The top 20 percent of households account for about 40 percent of consumer spending, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Federal Reserve economist."Since consumer spending represents 70 percent of U.S. gross domestic product, any pull-back in consumption by upper-income households would present a challenge for overall GDP growth," Feroli said.

Consumer spending unexpectedly contracted in June for the first time in almost two years, falling 0.2 percent after a 0.1 percent gain the prior month, according to the Commerce Department. That has contributed to a recovery that's already "considerably slower" than expected, according to the Federal Reserve.

"Household spending has flattened out," Fed policy makers said in a statement after their Tuesday meeting, predicting "a somewhat slower pace of recovery over coming quarters."

The Fed pledged to keep its benchmark interest rate near zero, a record low, at least through mid-2013 to encourage a rebound.

Shares of luxury retailers including Saks Inc. and Nordstrom Inc. have already begun to underperform the broader market and this may continue, potentially echoing the steep losses of three years ago, according to Peter Cook, chief investment officer at Performance Trust Investment Advisors in Chicago, which had more than $350 million assets under management as of July 31.

"We saw this in 2008, when high volatility and stock-market declines scared investors who are affluent," Cook said. "They don't spend as much money in that environment, which affects high-end retailers disproportionately."

New York-based Saks and Seattle-based Nordstrom have underperformed the Standard & Poor's 500 Index by 12 percent since July 19. These stocks declined 83 percent from Dec. 31, 2007 through Nov. 21, 2008, while the S&P 500 fell 46 percent, according to data on the sector.

Other companies that appeal to high-income households could be susceptible to underperformance if their sales unexpectedly decline, according to David Strasser, a New York-based analyst at Janney Montgomery Scott L.L.C.

Affluent consumers already have cut back on discretionary spending, based on data from Unity Marketing Inc., which tracks luxury retailing. These Americans spent 18 percent less on expensive goods in the quarter ending June 30, compared with a year ago. The average was $25,833 across 22 categories, the lowest since the third quarter of 2009.

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