Middle Class Spending Slows

Posted on August 29, 2006

The Wall Street Journal reports that middle class spending is finally starting to slow. The housing bubble is starting to burst, and that means the end of new home equity loans which have been financing a great part of the past few years of consumer spending. High gas prices are also taking a toll. The segment that is now feeling the crunch is solidly middle class. That economic demographic is now starting to cut back on everyday luxury items such as Starbucks and upscale cooking items from Williams Sonoma.

Amid the broader prosperity of the past decade, Americans grew far more willing to shell out for $4 cups of coffee and $400 handbags. Retailers such as Starbucks Corp., Whole Foods Market Inc. and Williams-Sonoma Inc. -- operator of Pottery Barn and its own kitchen stores -- expanded by appealing to the aspirations of middle-class shoppers.
Now, many of those retailers are feeling pinched. In recent weeks, Starbucks, Whole Foods and Williams-Sonoma -- along with others such as boat maker Brunswick Corp. and specialty-sandwich chain Panera Bread Co. -- have reported disappointing sales that sent their share prices lower. Restaurants catering to middle-income consumers are seeing a sales slump too. Growing evidence suggests the chief culprit is gasoline prices in the $3-a-gallon range -- up 71 cents from six months ago, according to federal data. Buyers "are spending a lot of money on gas," says Brunswick Chief Executive Dustan McCoy. "The sort of people who boat don't drive around in compact cars. They drive around in big cars or fast cars."
But Wendy Liebmann, president of consulting firm WSL Strategic Retail in New York, finds evidence in a recent survey of 1,500 consumers of a broader shift in consumer behavior after almost a decade in which most were "trading up" for high-end items. Many are now cutting back, she says, with low-income households becoming more likely to stick to dollar stores and supercenters and middle-income families visiting more mass merchants and grocery stores than specialty outlets.
Especially surprising, Ms. Liebmann says, is evidence that households earning as much as $75,000 a year are changing their habits. Survey responses among this group were more similar to those of low-income households than those of wealthy families, she says. The types of spending most likely to be chopped: fashion accessories, clothing, home d�cor, electronics and entertainment.

The wealthy so far haven't changed their spending habits. But it is the middle class which drives the engine of the U.S. economy, and the double whammy of high gas prices and a slow housing market doesn't bode well for the economic future.