According to CNBC’s Robert Frank, fears of a trickle-down recession may be starting with the top 10%, often referred to as the investor class. Why? The top 10% are NOT spending like they typically spend.
Luxury real estate is having its worst year since the financial crisis. According to Redfin, luxury homes priced at $1.5M+ declined -5% in Q2 2019. Unsold mansions and penthouses are stacking up everywhere. Three-year supplies of top tier real estate are now common in Aspen and The Hamptons and Manhattan’s luxury market is now experiencing its sixth consecutive quarter of sales declines.
Other indications that the top 10% are closing their wallets…Pebble Beach’s classic car auctions this August saw fewer than half the cars priced at $1M+ sold while cars priced at $75,000 or less seemed to “jump off the rack.” Both Sotheby’s and Christie’s, the dominant art auction purveyors in this country, saw their revenues drop -10% and -22% respectively during the first half of this year when compared to revenues earned in 2018. And retailers that cater to the top 1% are either declaring bankruptcy (Barney’s) or posting consecutive quarterly declines in revenue (Nordstrom) while Target and Wal-Mart are posting red-letter revenues.
According to Forbes, 92% of all retailers have said that tariffs increase prices and that escalating tariffs have “…closed the spigot.”
So how can recent consumer-spending reports reflect all smiles? Broader consumer sections and the middle class are continuing to spend while the top 10%, the drivers of nearly half of all consumer spending, are not.
How long can the overall economy continue to stay afloat without the top 10% driving spending? According to Mark Zandi, chief economist with Moody’s Analytics, “If high-income consumers fall back any further in their spending, it will be a significant threat to the economic expansion.”
How long can the middle class, those making 40%-89% of the income, continue to spend? “If job growth slows any further, unemployment will begin to rise and the middle class will pack it in, resulting in an economic downturn.”
No doubt the top 10% still has a lot of money to spend…they have made a lot of it in recent years. However, since the top 10% owns move than 80% of the stocks on Wall Street, the top 10% is highly sensitive to swings in the economy. They spend during times of economic certainty and confidence; they stop spending when that certainty and confidence become disrupted.
Global slowdowns in places such as Germany, China and likely Great Britain due to Brexit chaos and trade wars generate anything but economic certainty and confidence.