F. Scott Fitzgerald had it wrong: In a slowing economy, the rich aren’t that different from everyone else.
Affluent consumers, pinched by shrinking stock portfolios, falling property values and smaller bonuses, are behaving like their less-well-off peers: They’re reining in spending.
That portends a steeper slowdown than originally forecast for the U.S. economy, or even a recession, because the richest fifth of American households accounts for almost 40 percent of consumer spending, the main engine of economic growth.
“Upper-income consumers are the bellwether,” says Joseph Brusuelas, chief U.S. economist at IDEAglobal Inc., a Singapore- based research firm that advises central banks. “When they begin to capitulate, that’s when we all head down.”
Lower-income shoppers cut spending earlier this year as gasoline prices soared above $3 a gallon and higher payments on adjustable-rate mortgages forced some homeowners into default.
Now, the slumping stock and real-estate prices that followed have attracted the attention of the more-affluent — which might have surprised Fitzgerald, who wrote in his 1926 short story “The Rich Boy” that the very rich “are different from you and me.”
Confidence among these consumers dropped in the third quarter to its lowest level since 2004, according to Unity Marketing, a research firm in Stevens, Pennsylvania.
“Some of this may simply be the fact that the stock market has pulled back and may be giving some of the well-heeled reason for pause,” says Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc.
Part of the pain originated on Wall Street with the proliferation of securities backed by subprime mortgages. Before his ouster this month, former Citigroup Chairman Charles Prince vowed to eliminate or reassign more than 26,500 jobs. Lehman Brothers Holdings Inc. in August closed its subprime-lending unit and announced 1,200 layoffs.
Financial-industry bonuses will decline as profits at securities firms shrink, according to a report by the New York State Comptroller.
Sales of luxury goods “suffer, in a way that regular retail doesn’t, from what happens in the financial markets,” says Kamalesh Rao, director of economic research at MasterCard Advisors.
The longer oil prices remain elevated, while home and equity prices tumble, the more the rich will act like everyone else. “Historically we’ve counted on the high-end consumer to drive the economy forward,” says Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “If they pull back, the economy will unravel into recession.”