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Luxury Consumption Index Nose-Dives, Spending Drops

Double-Dip Recession is Possible if Consumer Confidence Doesn't Improve

Jul 27, 2011 5:25 PM   By Jeff Miller
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RAPAPORT... Unity Marketing's measure of consumer confidence among the highest earning U.S. consumers, the Luxury Consumption Index (LCI), took the steepest quarterly plunge since the Great Recession.  The LCI dropped 16.8 points to reach 66 points in the second quarter, which is significantly lower than the previous quarter's 82.8 points.  The LCI stands close to the level attained at the onset of the Great Recession, according to Unity Marketing.

"Consumer confidence among the affluent -- the economy's heavy lifter segment which account for only 20 percent of households, but over 40 percent of spending -- has fallen sharply since the beginning of 2011,'' said Pam Danziger, the president of Unity Marketing.  ''Not since the middle of 2009 has it been so low.''

Unity Marketing's LCI is considered to be a leading indicator of the economic activity among the most affluent households. Danziger said that if those at the top income levels feel stressed and unwilling to spend, it has to reflect on the middle-income households as well. ''We stand on the precipice of a double-dip recession, if the affluent consumer's confidence doesn't turn up in the next quarter," Danziger warned.

Corresponding to the decline in luxury consumer confidence, the average amount spent by affluent consumers on luxury goods and services in the second quarter 2011 declined by 8.4 percent from the first quarter and dropped 18.4 percent year on year.  

Commenting on the LCI data,  Tom Bodenberg, Unity Marketing's chief consumer economist, said, "While the index during the previous several quarters had shown normal variability, the coming several months portend a confidence level significantly lower than the current level.  Market pundits have been telling us that the 2007-2009 recession has run its course, and that it was only a matter of time before this event would have diffused into the consumer economy.  However, this is not the case, borne out by continued weakness in consumer sentiment. 

"On the other hand, the stock market has shown firm, almost counter-intuitive strength as many organizations report high earnings.  The rise in the stock market translates into a rise in the investment portfolios of luxury goods consumers, which translates into greater discretionary spending, especially among the high-net-worth (HNW) segment, as distinguished from the high earners who are holding their spending in check," Bodenberg said.

Danziger added that luxury marketers must identify and target the HNW customers in order to have a successful second half of 2011. ''The HNW consumers in our sample, defined as having $1 million or more of investible assets and representing some 47 percent of those surveyed, feel significantly more confident about their financial status than those with lower net worth.  Further some 42 percent of HNW, as compared with 14 percent of lower net-worth affluents, expect to increase their spending on luxury in the next 12 months.

"Increasingly income alone is not an accurate measure of a household's spending power," Danziger said. ''In the current economy many high-earning households are living pay check to pay check just like those in the middle-income brackets. Once the monthly expenses are met, the lower net-worth affluents don't have much left over with which to indulge in luxury."


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Tags: confidence, consumer, consumption, falls, Jeff Miller, luxury, plummets
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