The Rich Catch Everyone Else’s Cutback Fever

By: Motoko Rich, The New York Times

Commentary:

The economy is dependent on consumers – there is nothing new in that statement. But what is not so clear is what kind of consumer the system is dependent on. There are millions and millions of purchases made every day that remain constant throughout the year and regardless of recessions. Millions of people buy groceries (although the selection changes) and millions buy gas for their cars (although frequency changes). The point is that much of the economy is routine and provides what amounts to a base for normal activity while the growth tends to come from select areas of the consumer economy. One of the most vital is not surprisingly the affluent consumer with the disposable income necessary to drive huge retail sectors. This was the category that drove the majority of the boom in the last decade and it can be argued that this sector overreached and will now require some readjusting.

There were three observations made about that last period of consumer activity and there are three types of consumer that fit these patterns. The evidence is starting to accumulate that all three groups have undergone some changes and these changes will have a lot to do with the pace of economic recovery from this point. The most heavily damaged group was the “wannabe”. These are the consumers that barely qualified as far as disposable income is concerned but tried to get in that category by using their credit cards and by using their homes as sources of additional funds . They were overstretched and soon fell victim to the economic decline. This is the group that will be many years recovering from the financial collapse and for many companies that came to rely on their engagement the margins have narrowed drastically

The second group is the very rich and they usually change very little in terms of their behavior. This group is constant as far as spending is concerned, even now. But this is a small group and their decisions are rarely enough to affect consumer trends outside of the very high value categories. These people have far more influence over the investment client than over consumption per se.

That leaves the most critical group. These are the ones that are affluent but not in the upper 2% or 3%. This has been the traditional engine of consumer spending that accounts for the margins between profitable and break even economics. This group was hit hard by the recession in terms of their financial portfolios and for the first time this group was affected severely by layoffs and reduced incomes. The reaction of the consumer in this group has been to exercise caution and that is likely to be a reaction that will dominate for some time to come. When and if this group regains its consumer footing the economy may start to experience the rapid growth that sometimes follows a recession but that point has not manifested as yet.

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