The fears of a trickle down recessionary effect with it beginning at the top of the spending tree were stoked after reports emerged that the spending is being cut by the rich on everything from homes to jewelry.

According to the report pertaining to the United States market, the rich- who are at the very top of the economic tree, is currently the weakest spending segment in terms of expenditure for real estate and retail stores to classic cars and art. And even though there is continued spending by the middle class and broader consumer sections, economists warn of a further drag on growth of the economy because of the sudden reduction in spending among the wealthy as this trend would have a cascading effect down to the rest of the economy.

For the luxury real estate industry, this is the worst year since the global financial crisis of 2007-08. For example, there has been a sixth straight quarter of decline in growth in the pricey markets like Manhattan. In the second quarter of the current year, there was a drop of 5 per cent in the sales of homes priced at $1.5 million or more in the US, showed data from Redfin. There is a piling up across the country of unsold mansions and penthouses. This phenomenon is more evident in ritzy resort towns. There is nearly three-year supply of luxury listings in Aspen, Colorado, and the Hamptons in New York.

Those retailers who catered to the rich are the worst affected. For example, while Nordstrom reported three consecutive quarterly drop in revenue, the famed Barney’s filed for bankruptcy. At the same time, stronger than expected growth was reported by retailers like Wal-Mart and Target that cater to the needs of the everyday consumer.

Those cars that were priced the highest mostly remained unsold at the Pebble Beach car auctions organized earlier this month. This auction is known to fetch astronomical prices for select cars. Less than 50 per cent of the cars that were priced $1 million or more could be sold at the auction. On the other hand, those cars were priced below $75,000 were fast sellers with many cars being sold at a price that was more than their estimates.

And for the first time in years, there was a drop in art auctions in the first half of 2019. There was a drop of 10 per cent in sale at Sotheby’s while there was a 22 per cent drop in the auction sales at Christie’s.

According to economists, there are a number of reasons for the slump in the real estate such as tax changes.

According to Mark Zandi, chief economist at Moody’s Analytics, if the spending by the rich drops more, there can be a negative impact on the broader economy. Almost half of all consumer outlays is accounted for by the top 10 per cent of earners. But over the past two years, this section has reduced their spending while there has been an increase in the spending by the middle class in the US.

“If high-income consumers pull back any further on their spending, it will be a significant threat to the economic expansion,” Zandi said.

“If job growth slows any further, unemployment will begin to rise, (the middle earners) will pack it in, resulting in an economic downturn,” Zandi said.

(Adapted from CNBC.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability, Uncategorized