Some high-end retailers are already feeling the pinch
November 26, 2007 Detroit Free Press
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
Will the McSpending stop now that the McMansions aren't worth top dollar anymore?
This holiday season, economists and others are growing increasingly concerned about whether upper middle-class consumers will quit indulging themselves with little -- and not-so-little -- luxuries now that home values have slumped, adjustable rate mortgage payments are shooting up and SUVs are more expensive to back out of the garage.
Wealthier consumers, by their nature, spend a lot of money. So if they stop spending on things like Coach handbags, Starbucks coffee or trips to Nordstrom -- especially when the economy seems on shaky footing already -- it's a big deal.
It's a concern that could easily spell trouble for the U.S. economy.
"If those consumers pull back significantly, it adds to the recession risk," said Mark Zandi, chief economist for Moody's Economy.com.
Zandi notes that in recent years, a booming housing market and a robust stock market have meant that some higher middle-income consumers -- those with incomes of $75,000 to $150,000 -- have been able to trade up and, yes, spend more money.
Yet, this season it's getting to be more fashionable to be frugal.
"There are some preliminary signs that the higher-end retailers are starting to feel a bit of a pinch here," said Brian Bethune, U.S. economist for Global Insight in Lexington, Mass.
Other points to consider:
• Just since Sept. 19, Coach Inc.'s stock has dropped about 30% to close at $35.91 a share on Friday. Nordstrom Inc. has gotten socked, too -- down about 31% since Sept. 19. Nordstrom's stock closed at $35.72 on Friday.
Nordstrom Inc. reported a 2.4% drop in sales for October at stores open at least a year. Analysts saw this as a sign that luxury retailers are more vulnerable than many once believed when it comes to the credit crunch and the shaky housing market.
• Starbucks Corp. reported its first decline in customer visits ever. And Starbucks CEO Jim Donald said in various interviews that economic headwinds hit stronger than expected.
• Other retailers, such as Polo Ralph Lauren, are also warning about signs of more cautious discretionary spending.
"The higher-end consumer is not immune," warned David Sowerby, a Bloomfield Hills-based portfolio manager for Loomis, Sayles & Co.
Sowerby said that the mortgage mess is hitting some higher-end consumers. Some higher-income, middle-class consumers invested in speculative real estate and lost money in markets like Florida or Arizona when housing values dropped.
Other higher-end consumers lost money if they invested in stocks, too. Wall Street's jitters have led to a 10% correction in the stock market.
The Dow Jones Industrial Average has fallen from 14,164.53 on Oct. 9 to 12,980.88 on Friday.
Bethune notes that it's difficult to say at this point how many well-off consumers will reduce their overall spending.
And not everyone is in a panic.
Marc Voss-Stadler, director of credit risk management for Daimler Financial Services Americas in Farmington Hills, told me that there is a strong correlation between luxury car sales and housing prices.
Rising housing prices have no doubt helped fuel luxury vehicle sales -- especially as some consumers borrowed against their home equity to finance their cars or SUVs.
But Voss-Stadler said it's difficult to say whether automakers will see things go in reverse now that home prices are pulling back. He said the launch of the C-Class for Mercedes, for example, has boosted financing of Mercedes-Benz products through the financial group.
The new 2008 Mercedes-Benz C-Class sedan will begin pricing at $31,975 for the new C300 Sport Sedan.
Voss-Stadler said the U.S. economy has shown other signs of strength. He noted that capital spending has continued for Daimler truck fleet sales.
"We don't expect deterioration beyond what we've experienced," he said.
But he acknowledged that it's unknown right now how the housing fallout will impact consumer spending overall. "Is fear going to spread?" he asked.
California, which has had its share of housing troubles, represents 30% of Mercedes-Benz Financial's loan portfolio.
Diane Swonk, chief economist for Mesirow Financial in Chicago, said the super-rich are still doing very well. "The Bentleys are selling," Swonk said.
And the really wealthy continue to buy real Prada handbags -- not knockoffs. Many Prada purses are priced at $2,000, not $200.
At the Saks Fifth Avenue Web site, for example, there's a warning next to one Prada handbag:
"Due to high demand, a customer may order no more than three units of this item every thirty days."
The item? A purse priced at $2,360. The official name is the Nappa Gaufré Convertible Satchel. There are similar warnings on other Prada products.
Yet Swonk and other economists note that the lower-end of upper income consumers are under more pressure.
Everyone is getting squeezed when gas hits $3 a gallon or higher.
Zandi is concerned that wealthier consumers will really be forced to cut back if oil hits $100 a barrel or higher -- and the price at the pump climbs to $4 a gallon early next year. "I think recession risks are very high," Zandi said.
Some industries, such as financial and brokerage services, keep cutting back and laying off more workers nationwide.
Troubles in the housing market also mean that consumers cannot easily tap into the equity in their homes to spend more.
Roger Haynes needed to take out a $30,000 loan when he wanted to sell his house.
He had found a buyer, but the buyer was only agreeing to pay far less than Haynes owed on the house.
The couple owed $266,000 on their primary mortgage and $29,000 on the second -- totaling $295,000 in mortgage debt.
The house sold for $285,000.
The couple needed $10,000 to cover that mortgage debt -- and $29,000 more to cover repairs, closing costs, taxes, the real estate commission and other costs. The Haynes used some savings and borrowed money to make sure they could sell the house.
Now, they're cutting back in order to make monthly payments on that added debt.
"I had to squeeze out spending to the tune of about $1,000 a month," said Haynes, an attorney in Wyoming, near Grand Rapids.
He had dropped out of several professional organizations to save about $750 a year in dues and switched to electronic subscriptions to save about $2,500 a year. He has put extra computers, electronic equipment and televisions on eBay. He has stopped buying brand names at the grocery store. He and his wife, Nancy, have cut back on shopping at Macy's or other higher-end department stores.
November 26, 2007 Detroit Free Press
BY SUSAN TOMPOR
FREE PRESS COLUMNIST
Will the McSpending stop now that the McMansions aren't worth top dollar anymore?
This holiday season, economists and others are growing increasingly concerned about whether upper middle-class consumers will quit indulging themselves with little -- and not-so-little -- luxuries now that home values have slumped, adjustable rate mortgage payments are shooting up and SUVs are more expensive to back out of the garage.
Wealthier consumers, by their nature, spend a lot of money. So if they stop spending on things like Coach handbags, Starbucks coffee or trips to Nordstrom -- especially when the economy seems on shaky footing already -- it's a big deal.
It's a concern that could easily spell trouble for the U.S. economy.
"If those consumers pull back significantly, it adds to the recession risk," said Mark Zandi, chief economist for Moody's Economy.com.
Zandi notes that in recent years, a booming housing market and a robust stock market have meant that some higher middle-income consumers -- those with incomes of $75,000 to $150,000 -- have been able to trade up and, yes, spend more money.
Yet, this season it's getting to be more fashionable to be frugal.
"There are some preliminary signs that the higher-end retailers are starting to feel a bit of a pinch here," said Brian Bethune, U.S. economist for Global Insight in Lexington, Mass.
Other points to consider:
• Just since Sept. 19, Coach Inc.'s stock has dropped about 30% to close at $35.91 a share on Friday. Nordstrom Inc. has gotten socked, too -- down about 31% since Sept. 19. Nordstrom's stock closed at $35.72 on Friday.
Nordstrom Inc. reported a 2.4% drop in sales for October at stores open at least a year. Analysts saw this as a sign that luxury retailers are more vulnerable than many once believed when it comes to the credit crunch and the shaky housing market.
• Starbucks Corp. reported its first decline in customer visits ever. And Starbucks CEO Jim Donald said in various interviews that economic headwinds hit stronger than expected.
• Other retailers, such as Polo Ralph Lauren, are also warning about signs of more cautious discretionary spending.
"The higher-end consumer is not immune," warned David Sowerby, a Bloomfield Hills-based portfolio manager for Loomis, Sayles & Co.
Sowerby said that the mortgage mess is hitting some higher-end consumers. Some higher-income, middle-class consumers invested in speculative real estate and lost money in markets like Florida or Arizona when housing values dropped.
Other higher-end consumers lost money if they invested in stocks, too. Wall Street's jitters have led to a 10% correction in the stock market.
The Dow Jones Industrial Average has fallen from 14,164.53 on Oct. 9 to 12,980.88 on Friday.
Bethune notes that it's difficult to say at this point how many well-off consumers will reduce their overall spending.
And not everyone is in a panic.
Marc Voss-Stadler, director of credit risk management for Daimler Financial Services Americas in Farmington Hills, told me that there is a strong correlation between luxury car sales and housing prices.
Rising housing prices have no doubt helped fuel luxury vehicle sales -- especially as some consumers borrowed against their home equity to finance their cars or SUVs.
But Voss-Stadler said it's difficult to say whether automakers will see things go in reverse now that home prices are pulling back. He said the launch of the C-Class for Mercedes, for example, has boosted financing of Mercedes-Benz products through the financial group.
The new 2008 Mercedes-Benz C-Class sedan will begin pricing at $31,975 for the new C300 Sport Sedan.
Voss-Stadler said the U.S. economy has shown other signs of strength. He noted that capital spending has continued for Daimler truck fleet sales.
"We don't expect deterioration beyond what we've experienced," he said.
But he acknowledged that it's unknown right now how the housing fallout will impact consumer spending overall. "Is fear going to spread?" he asked.
California, which has had its share of housing troubles, represents 30% of Mercedes-Benz Financial's loan portfolio.
Diane Swonk, chief economist for Mesirow Financial in Chicago, said the super-rich are still doing very well. "The Bentleys are selling," Swonk said.
And the really wealthy continue to buy real Prada handbags -- not knockoffs. Many Prada purses are priced at $2,000, not $200.
At the Saks Fifth Avenue Web site, for example, there's a warning next to one Prada handbag:
"Due to high demand, a customer may order no more than three units of this item every thirty days."
The item? A purse priced at $2,360. The official name is the Nappa Gaufré Convertible Satchel. There are similar warnings on other Prada products.
Yet Swonk and other economists note that the lower-end of upper income consumers are under more pressure.
Everyone is getting squeezed when gas hits $3 a gallon or higher.
Zandi is concerned that wealthier consumers will really be forced to cut back if oil hits $100 a barrel or higher -- and the price at the pump climbs to $4 a gallon early next year. "I think recession risks are very high," Zandi said.
Some industries, such as financial and brokerage services, keep cutting back and laying off more workers nationwide.
Troubles in the housing market also mean that consumers cannot easily tap into the equity in their homes to spend more.
Roger Haynes needed to take out a $30,000 loan when he wanted to sell his house.
He had found a buyer, but the buyer was only agreeing to pay far less than Haynes owed on the house.
The couple owed $266,000 on their primary mortgage and $29,000 on the second -- totaling $295,000 in mortgage debt.
The house sold for $285,000.
The couple needed $10,000 to cover that mortgage debt -- and $29,000 more to cover repairs, closing costs, taxes, the real estate commission and other costs. The Haynes used some savings and borrowed money to make sure they could sell the house.
Now, they're cutting back in order to make monthly payments on that added debt.
"I had to squeeze out spending to the tune of about $1,000 a month," said Haynes, an attorney in Wyoming, near Grand Rapids.
He had dropped out of several professional organizations to save about $750 a year in dues and switched to electronic subscriptions to save about $2,500 a year. He has put extra computers, electronic equipment and televisions on eBay. He has stopped buying brand names at the grocery store. He and his wife, Nancy, have cut back on shopping at Macy's or other higher-end department stores.
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