Affluent Consumers Spend Again
American consumers are spending again—at least those who have jobs and money in the bank.
That’s become clear over the past few weeks and especially in some key earnings reports we’ve seen recently.
Yes, they’re being highly selective and remain price-sensitive. And their additional spending won’t be big enough to turn around the huge ocean liner of total US consumer spending, more than two-thirds of gross domestic product.
Still, the return of the affluent consumer is one more piece of an uneven, but very real economic recovery that’s falling into place. And it does support at least somewhat the big stock market rally we’ve seen since last March, especially in consumer cyclical stocks, which have way outperformed the Standard & Poor’s 500 index.
By some measures, consumer confidence has improved dramatically. The Reuters/University of Michigan consumer sentiment index hit a two-year high in January, before slipping a bit this month. Americans are getting more optimistic about current economic conditions, and that’s reflected in a growing appetite for big-ticket household goods like furniture, appliances, and flat-screen TVs.
In its January survey, ChangeWave Research also saw a big surge in US consumers’ willingness to spend.
The latest ABC News Consumer Comfort index, released Tuesday, was pretty grim overall.
But it showed that affluent consumers—households that make more than $100,000 a year—have much more confidence in the economy than the rest of the population does, and that confidence has risen dramatically from its 12-month lows. There’s been a nice improvement among households earning between $75,000 and $99,999, too, although both groups’ sentiment remains in negative territory.
According to the US Census Bureau, nearly 18% of US households earned more than $100,000 a year as of 2006 (the latest data available) and another 12% had annual income between $75,000 and $100,000. That’s around 33 million households altogether, but the number is almost certainly lower now, because of the recession and housing bust.
Still, the affluent have a disproportionate impact. Households earning more than $100,000 a year represented nearly half of all consumer spending before the recession, according to Mark Zandi of Moody’s Economy.com. That percentage dropped to 45%, but as this group steps up its participation, it could give the economy a shot in the arm.
Exhibit A: Whole Foods Market (Nasdaq: WFMI), the organic and gourmet food retailer that was symbolic of the easy consumption of the mass affluent during the 2000s.
But when the recession hit, buyers fled “Whole Paycheck” like the plague. The chain’s sales and earnings tumbled, and its share price plummeted nearly 90% to around $9 from its all-time high above $73 a share.
This week, Whole Foods reported much better than expected earnings on strong revenue gains and good same-store sales increases. It also said revenues would rise by double-digit percentages in 2010, and same-store sales would increase by a healthy amount as well. The stock has nearly quadrupled since its December 2008 low.
One key change: Whole Foods added more discounts and price promotions, so consumers believed they were getting their money’s worth there. Value remains the key.
Also, the travel industry is showing new signs of life. The BlueKai Pulse index found that the number of online flight searches soared 45% from December 2009 to January, about evenly divided between domestic and international destinations.
The number-one domestic destination: Las Vegas, up 67% from December. That’s good news for Sin City, where business has been in the doldrums for a long time.
Searching for flights is not the same as booking them, of course, but it shows consumers who have money are thinking about ways to spend it.
Airlines’ passenger traffic has been improving, but it’s still far from its early 2008 peak.
Meanwhile, rental-car chains have reported strong earnings this week. Avis Budget Group (NYSE: CAR) had a smaller than expected loss in the fourth quarter, while Dollar Thrifty Automotive Group (NYSE: DTG) posted a surprise profit. Rental car companies’ stocks have been on a tear lately.
And in an interview on PBS’s Nightly Business Report Wednesday, Andy Coslett, chief executive officer of Intercontinental Hotels Group (NYSE: IHG), which also operates Holiday Inn and Crowne Plaza hotels, said: “The leisure markets remain really very strong and we're very busy on the weekends.”
He attributed that to the fact that “the deals out there are so great.” But he had yet to see the return of the key business traveler.
More affluent consumers are stepping up in consumer electronics and technology, too.
ChangeWave Research found particular strength in that area towards the end of last year.
Consumers have snapped up netbooks, often with low-power Intel Atom chips, as well as new tablet devices from Amazon.com (Nasdaq: AMZN), Barnes & Noble (NYSE: BKS), Sony (NYSE: SNE), and soon, from Apple (Nasdaq: AAPL). Microsoft’s (Nasdaq: MSFT) Windows 7 operating system—and Snow Leopard, the latest version of Apple’s Mac OS X —provide more reasons for affluent consumers to upgrade.
These may all be straws in the wind. Value remains critical even to moneyed consumers, as the premium-wine industry is learning the hard way
Fine wine, once the ultimate status symbol of the nouveaux riches, is sitting on warehouse shelves, and some of Napa Valley’s biggest names are holding their noses and slashing their prices.
"’The new chic is value, and it's here to stay,’" one Sonoma vineyard owner told The Wine Spectator. "’People still want a luxury product, but guess what? They want it at a value.’”
That will be true as long as unemployment remains high and the recovery appears weak. Even if employment returns with a vengeance, I don’t expect to see people spending with wild abandon again.
Because even the relatively well-off will have to count their pennies for some time to come (and they, too, cut back in January as part of a post-holiday belt-tightening, according to a new Gallup poll).
So, their return to spending is good news—but not worth breaking out that discounted bottle of Cristal just yet.
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own, and he does not own any of the stocks mentioned in this column.