(Bloomberg News) Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in.
Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart Stores Inc., the world's largest discount retailer, reports "everyday Americans" are living paycheck to paycheck as they await an improvement in job prospects.
"The heavy lifting is being done by the upper-income households," said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York. "They're the ones benefiting the most from the stock market rally, and they're spending."
The uneven progress in household expenditures, which account for about 70% of the economy, helps explain why Fed policy makers likely will keep interest rates near zero and complete a second round of Treasury purchases. Unemployment averaged 9.6% last year, the highest rate since 1983, even as the expansion gathered speed.
Consumer purchases reflect bigger gains among high-income households and "financial pressures on those of more-modest means," according to minutes of the Fed's Dec. 14 meeting. Feroli estimates the top 20% of wage earners account for about 40% of spending, while Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, puts their contribution at closer to 50%.
Biggest Annual Gain
High-end retailers led the increase in December sales at stores open at least a year, company data showed Jan. 6. The Bloomberg Retail Sales Luxury Index jumped 8.1% from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9% rise. Nationwide, retail sales climbed 0.6% last month, capping the biggest annual gain in more than a decade, according to the Commerce Department.
The U.S. lost about 8 million jobs during the worst recession since the 1930s, and Fed Chairman Ben S. Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption.
Purchases made in the third quarter with American Express Co. credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, reached in 2008, while the combined total for Visa Inc. and MasterCard Inc. didn't experience a similar rebound, according to company data.
"The labor-market recovery will become more widespread as we go through 2011, which should take away some of the imbalance" in purchases, said Maki, who specialized in researching household finances at the Fed from 1995 to 2000. "We definitely expect to see some catch-up in spending by middle and lower-income households. It's one of the ways the recovery will become more entrenched."