Will Luxury Spending Save the Economy?

While the economy is posting mixed signals on recovery, people in the top 2 percent of the population are quietly picking up their spending, finds a Unity Market survey conducted last month.

Affluent customers “though still cautious, believe that the U.S. economy is stronger now than it was three months ago,” the findings conclude, showing that the wealthiest Americans increased their spending by 40 percent over the last two quarters. That's in line with retail sales results, which posted strong numbers both for the holiday season and a surprising rise in January, a month when that figure usually dips thanks to returns of store merchandise purchased during the holidays.

What seems to have happened this year is that while the overall population was conservative in its holiday shopping, many people received gift cards and were more than happy to spend them, Macy’s Terry Lundgren says. That helped keep the return volume—which can jump as high as 66 percent post-holiday—to a minimum.

And data shows that the post-holiday spending trend is set to continue through this quarter. Luxury buyers, especially those under 40, are heading back into stores as immediate concerns about the job market slowly ebb with the nation’s monthly unemployment rate stabilizing. And with many companies issuing new guidelines about bonus pay, it’s no longer seen as gauche to spend some cash. Which doesn't mean that bankers and CEOs should go on a major shopping spree now that more conservative packages are being handed out—or bonus pay being withheld altogether. But with companies seeming to reel back their lavish bonuses, Main Street isn't out for major blood when it sees the corner office set pull out a credit card.

The era of conspicuous consumption is not making a comeback, but it’s seen as acceptable to buy a new party dress to an executive function or a new watch to celebrate a promotion. Designer Pamella Roland sees the shift in spending from mid-2008 to now reflected in her retail stores and in orders placed by department stores. “Last year, women were afraid to spend, even if they had the money. But this year, they’re back to wanting to dress up. And whereas before [the recession] they may have bought three dresses, now they’re splurging on one glamorous gown.”

Keeping the momentum going into March is Hollywood’s awards season culminating with the Oscars. Jewelers, watchmakers, and couturiers can unabashedly hawk their goods to the celebrity population, which has managed to largely escape the downturn and therefore has more disposable cash on hand to spend. Luca Luca president Yildiz Blackstone is already getting requests for red-carpet looks, as is Roland.

What happens after March remains to be seen. Retailers across the board, not just in luxury, have raised their outlooks when reporting earnings in the past month, but despite the forecast for more spending, the majority are not hiring. Lundgren, noting an uptick in business at Macy’s higher-end Bloomingdale’s unit, wants to see more of mainstream buyers come in before he will consider adding new jobs. That will likely hinder mainstream spending, but with the luxury retailers lifting bottom lines, a recovery is looking more likely than a dip.