Luxury Markets Will Come Back in the Economic Recovery

For years I heard sellers of luxury goods say, "The rich will always have money."  Then the recession came and we learned that the rich will not always spend their money.  As an example, I wrote a blog post using the mega-yacht business as an example of the economics of the luxury market.

Now some hot-shot quantitative economists have illuminated me even more.  Jonathan A. Parker and Annette Vissing-Jorgensen (both of Northwestern University) have written a paper about how consumer spending varies across the business cycle.  Their conclusion is that the spending of the upper income groups is much more variable than the spending of lower income groups.  (The article appeared in the American Economic Review: Papers and Proceedings, May 2009.  Available here: Who Bears Aggregate Fluctuations and How?)

The find that the variation of spending over the business cycle for the top 10 percent of the income distribution is five times greater than for the average household.  The higher up the income distributions you go, the greater the variability.  Here's a common sense explanation:  if you're buying rice and beans, you keep on buying rice and beans all the time.  When you are buying caviar, you can step back to lobster if you get nervous about the economy.

They also report that this pattern is much more prounounced since 1980.  In the old days, the rich had more stable incomes, probably because they worked little and earned their incomes from dividends and bonds.  Since then, work income has become greater, as has capital gains.

Business implications for the luxury market:  Don't give up.  When the economy turns, upper incomes will turn more than average incomes, and spending will go up sharply.  Although we have not calibrated the change in consumer attitudes due to the recession, I expect that the upper one percent of the income distribution will return at least partially to their old spending patterns.  Be ready to serve them.  (You can listen to my thoughts on What Business Needs to Know About the Rich.)