The Lapse Of Luxury

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According to President-elect Trump’s taxation plan, the wealthy are in store for a hefty tax cut. This is much-needed good news for the luxury goods industry, which depends heavily on affluent buyers. Although overall luxury spending was thriving in the first years following the recession, spending among high-income consumers (along with the stock prices and revenues for most major luxury brands) have been in decline over the last two years. What’s going on? Among luxury consumers, income growth is slowing, household net worth is no longer booming, and consumer confidence has fallen. Thanks to shifting generational preferences, the industry’s tried-and-true strategy of going all-in on prestige in bad times may not work today.

Since 2015, the industry has been struggling by almost every measure. Stock prices for luxury mainstays such as Michael Kors, Coach, and Ralph Lauren are at less than half of their post-recession highs—even after ticking up in Q3 2016. Shares of Tiffany & Company, Williams-Sonoma, Sotheby’s, and Nordstrom are down by roughly half as well. In New York City, luxury apartments have been on the market 36% longer than they were last year. Even classic luxury goods like watches are suffering. Luxury appears to be the only retail sector that isn’t participating in the late-year Trump rally. All told, 2016 is on pace to be the weakest year for global high-end personal goods sales since 2009.

The harsh reality is that the rich aren’t splurging for bling like they used to. Worse yet, just 19% of high-income Americans plan to spend more in the next 12 months than they have in the previous 12 months—down from 30% in 2014.

So why are people cutting back?

For starters, income plays a leading role in luxury spending. In the immediate aftermath of the Great Recession, when real average income growth was going disproportionately to the wealthiest households, that role was positive. Starting in 2013 when the top tax rate jumped, this trend began to reverse.

Market forces are also putting a damper on luxury purchases. For less-affluent Americans, spending is driven largely by employment and wages. For the mega rich, net worth does a lot more of the driving. This relationship buoyed the luxury industry in the early years of the recovery, when falling interest rates, a rising stock market, and quantitative easing boosted the net worth of the wealthy.

In 2015, however, the market plateaued. Yes, it has boomed post-Trump, but we don’t know how long the boom will last. In the months to come, one positive effect of the Trump rally—if it sticks around—will be a rise in all-important affluent confidence. We’re already seeing some inkling of this happening. Though affluent confidence has been on a downward trajectory since 2015, Conference Board data show that optimism grew among higher earners (<$25,000) and fell among lower earners (>$25,000) in November.

One negative effect, on the other hand, will be the rising dollar, which will stimulate U.S. demand for foreign luxury brands and suppress foreign demand for U.S. luxury brands. Market and currency woes in Asian emerging markets (including China, which represents an incredible 30% of global luxury goods sales) will be very bad news indeed. The negatives will far outweigh any positive impact of improving U.S. consumer sentiment.