The Wonk Room

Middle Class Families Pinch On Necessities, While The Wealthy Splurge On Luxury Goods

In the newest twist on the trend of rising income inequality among American families, there is a growing disparity in domestic consumer spending. Forced to decide between filling up the gas tank and paying the electric bills, versus a night out to dinner and new clothes for summer, consumers are sticking to necessities.

What’s interesting, however, is not that Americans are buying only what they need, but that in today’s faltering economy, Americans are changing the very definition of necessity. Starbucks, whose profits have been falling steadily since late 2007, reported earnings last week that disappointed expectations by 11 percent, influenced by “soft sales in California and Florida, where consumers have been hurt by soft home prices and the subprime-mortgage crisis.” Formerly considered an “affordable luxury,” the purchase of a $5 latte has morphed into an extravagance for the average American.

The trend goes far beyond amenities like coffee. As the New York Times reported this weekend:

Spending data and interviews around the country show that middle- and working-class consumers are starting to switch from name brands to cheaper alternatives, to eat in instead of dining out and to fly at unusual hours to shave dollars off airfares. … Wal-Mart stores reports stronger-than-usual sales of peanut butter and spaghetti, while restaurants like Domino’s Pizza and Ruby Tuesday have suffered a falloff in orders, suggesting that many Americans are sticking to low-cost home-cooked meals.

A study conducted by WSL Strategic Retail yielded similar results:

Fashion accessories, home decor items, premium brands or food and specialty coffees, eating at restaurants and takeout foods, and tickets to entertainment, are the top areas where people are trimming their spending.

This pattern, however, hasn’t extended universally across the U.S. economy. Sales of true luxury goods — jewelry, private jets, contemporary art, expensive real estate, yachts — are higher than ever before, despite their climbing price tags. In some cases, the luxury market is setting records. In real estate, for example, 71 $10-million apartments have sold so far this year in Manhattan. In all of last year, only 17 were sold.

Expensive jewelry sales are the same way. A story on CNN’s American Morning explained this phenomenon, noting that “women or their husbands who are buying this jewelry say to a certain extent if we have the money, if we don’t buy it now, the price is only going up.”

The difference between the haves and the have nots seems to be widening by the day. The wealthiest 10 percent of Americans account for more than half of all U.S. consumer spending, and in an era where families are struggling to pay their bills, put food on the table, and secure healthcare, soaring executive profits are a little hard to swallow.

UPDATE: Calculated Risk has more.