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Consumer spending trend is a shaky foundation for economic recovery

Analysts say the upswing in buying is largely by affluent people snapping up luxury items and delinquent homeowners who have extra money since they aren't making their mortgage payments.

May 16, 2010|By Don Lee, Los Angeles Times

Reporting from Washington — Increased consumer spending has fueled hopes that the current economic recovery will keep getting stronger, but behind the encouraging numbers is a little-noticed reality: Much of the new spending has come not from America's broad middle class but from a small slice of affluent people at the top.

And upper-crust spending, while welcome, can be worrisomely volatile: Since it involves luxuries, not everyday necessities, the buying can suddenly shrink if something such as the recent stock market plunge panics affluent shoppers.

What's more, some analysts calculate that another big chunk of the recent spending spurt has come from an even shakier source — delinquent homeowners who have more cash in their pockets because they've stopped making mortgage payments now that their houses are worth less than the loan amounts.

Economists' uneasiness over building a recovery on such uncertain foundations is all the greater because the larger fundamentals are also shadowed by uncertainty.

The improving job market should broaden the base of consumer spending, but wages are not expected to go up fast, which will crimp middle-class spending power.

Moreover, the job gains this year have gone largely to less-educated and lower-income workers, according to Labor Department statistics.

"The economy can grow if lower-income households aren't able to spend, but it can't flourish," said Mark Zandi, chief economist at Moody's Economy.com.

The recent acceleration of spending "was a little bit of release of pent-up demand," said Ken Goldstein, an economist at the Conference Board, a New York research group that tracks consumer activity.

"We survived the recession, we deserve a night out," Goldstein said of the mood of many spenders. Without much more job growth and bigger incomes, he said, "that window will close fast."

The surge in spending by upper-income Americans could be seen in the upturned sales of high-end cars, clothing and luxury services. Nieman Marcus, Mercedes and Morton's restaurant, among other companies catering to the affluent, have prospered accordingly.

Since December, sales at luxury chains have outpaced those at department stores and discounters, helping boost overall consumer spending by a surprisingly robust 3.6% in the first quarter, according to data from the International Council of Shopping Centers.

But an economy that has become more dependent on the well-to-do is an economy at the mercy of volatile financial markets.

The soaring stock market last year boosted the spirits of high-income consumers and helped open their wallets. Wall Street's latest plunge and the continuing fear of a financial meltdown in Europe can just as quickly send them running for cover.

Penny Gilbert, 44, of Sherman Oaks said that what happens in Europe and in the stock market over the next few weeks would determine whether she and her family vacation in Hawaii this summer or take a trip closer to home, such as to the Grand Canyon.

"I'm very leery about the future," she said. "That was scary last week when it dropped 1,000 points for no reason," referring to the brief plunge May 6 in the Dow amid rapid-fire electronic trading and widening financial turmoil in Greece.

Last summer the Gilberts, who have two children in private school, were afraid to go anywhere and spend money, she said. Gilbert works part time as a research consultant. Her husband is a lawyer. "We stay-cationed," she said.

Now, having recouped some of their stock losses and with home prices in their community stabilizing, Gilbert is getting ready to plow as much as $20,000 into repainting their house and buying a new air conditioning and heating system.

"I haven't seen any more foreclosures in our area," she said.

In American Express' monthly "Spending & Saving Tracker" survey, 70% of homeowners with incomes of $100,000 or more said in April that they were planning home improvements this year, spending an average of $11,500. That's about double the amount lower-income homeowners plan to spend.

In fact, Labor Department surveys show that the top 20% of U.S. households in income account for about 40% of all spending.

In recent months, the wealthiest Americans apparently have been driving an even more disproportionate share of consumption.

According to estimates from Economy.com, they've also contributed an outsized share of the corresponding decline in saving, which has worried some analysts and policymakers. After rising to about 5% in the second quarter of last year, the personal savings rate fell below 3% this spring.

Economists said it's common for affluent consumers to lead the spending in a recovery, but it's crucial that greater prosperity spread to the rest of the population.

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