Sorry, The Upper Class Will Not Pull The US Economy Out Of The Depression

Several months ago Zero Hedge did an exhaustive study of relative contributions to GDP by consumer class decile: the conclusion was that even though it accounts for a mere 10% of US population, the ultra rich are responsible for over 40% of consumption in the US (yes David Bianco, that ever critical 70% of GDP, get over it). Of course, they end up being taxed for the privilege of consuming so much, but that's irrelevant for this post. What is, however, is a recent GALLUP poll which proves that Rosenberg's theme of "new normal frugality" is now entrenched in the consumer's psyche, and not just among the lower- and middle-classed, but, most surprisingly, in the higher income brackets as well. In November the richest Americans reported a 14% drop in average daily discretionary spending to $117. This is a far cry, and 30% off, from the peak of $185/day report in April of 2008. It also represents a disappointing downward inflection from October 2009, when hopes prevailed that upper income spending would once again take off courtesy of 33 Liberty.

More from Gallup:

In a sign that the new normal in consumer spending continues unabated, upper-income Americans' self-reported average daily spending in stores, restaurants, gas stations, and online fell 14% in November, reverting to its relatively tight ($107 to $121) pre-October 2009 average monthly range. Middle- and lower-income consumer discretionary spending increased by 7% last month but remained in its tight 2009 average monthly range of $52 to $61. Still, consumer spending by both income groups continues to trail year-ago levels by 20%, even as those comparables have gotten easier to match -- possibly dashing hopes that upscale retailers and big-ticket-item sales will do better this year.

What is less surprising is that fragility is definitely the name of the game in the formerly "aspirational consumer" category:

Consumers' self-reported spending on discretionary items among middle- and lower-income Americans (those making less than $90,000 a year) was down 20% in November from the depressed spending levels of a year ago. As expected, this percentage decline from November 2008 is more modest than the year-over-year declines of earlier in the year as year-ago comparables have become easier to match. Although average daily spending among this group was technically at its high for 2009 last month, it continues to reflect a "new normal" spending pattern, staying within a tight $4 spending range that has persisted during the past four months.

The upper-class consumption inflection point happened in November...And not in the direction the administration desired:

Spending among upper-income consumers (those making at least $90,000 a year) had reached its highest level of 2009 in October and had closed the gap to -6% compared to the same month a year ago. The hope was that the surge on Wall Street and the seeming stabilization of housing values had encouraged some upper-income consumers to abandon the 2009 spending new normal. November's results dashed these hopes, as upper-income consumers joined their middle- and lower-income counterparts in spending 20% less than they had during the financial crisis days of 2008 and returning to the relatively tight 2009 daily spending range for this group prior to October.

Stratified by age groups, the biggest consumption drop happened in the traditionally richest age groups: the 50+ category.

Consumers in the child-rearing ages of 30 to 49 showed the smallest November-over-November discretionary spending decline at 15% -- possibly because they have the least ability to downshift their spending as the holidays approach. Younger consumers aged 18 to 29 experienced a larger decline of 23%. Those 50 to 64 years of age reduced their year-over-year spending by 29%, while those 65 or older had a decline of 32%. Overall, those in the 30 to 49 age group had the highest average daily spending level in November ($81), while those 65 or older spent the least per day ($52).

Gallup essentially repeats Rosie's new frugal thesis word for word in their summary observations:

Overall self-reported consumer discretionary spending has been essentially flat on a monthly basis throughout 2009 even when broken out by age, income, region, and gender. It has also been down significantly compared to the same months in 2008. The year-over-year differences have declined somewhat during recent months, but much of this closure in the 2008-2009 spending gap is a result of the easier spending comparables from last year's financial crisis.

Gallup's analysis of the relationship between job creation and consumer spending suggests that these lower spending levels are attributable, at least in part, to today's dismal job-market conditions. Further findings show that the current lack of job creation has its greatest impact on middle- and lower-income consumer spending.

In this regard, October upper-income spending provided new hope that the surge in the stock market and the increased stability of housing prices might be encouraging these consumers to break out of their year-long and relatively tight spending range. Instead, November's results show that upper-income spending reverted back to its new normal range. Given the greater discretionary spending flexibility of upper-income Americans, this reversion to the pre-October spending range tends to give added face-validity to the argument that a consumer spending new normal exists -- independent of the job situation -- as 2010 approaches.

On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead. In turn, reduced consumer spending will complicate the job-creation problem, not to mention fiscal and monetary policies. For example, one might argue that the federal government and monetary authorities (the Fed) need to take emergency actions to offset a temporary spending shortfall due to job losses, but the same arguments do not necessarily hold true when the spending reduction results from a new normal spending pattern -- generally speaking, the private sector needs to adjust to such changes in consumer behaviors.

For retailers, small businesses, and the companies that supply and support them, a new normal spending pattern can mean complex changes involving downscaling, upselling (people taking advantage to buy upscale for less), inventory management, and people-related adjustments. The U.S. economy is designed to allow the private sector to make such adjustments in order to optimize performance when faced with such a rapidly changing business environment. Of course, the same does not apply to maintaining the social safety net, particularly in the face of double-digit unemployment and even higher underemployment.

While the spending "new normal" may not be good for the larger economy in the short-term, it may be seen as a strong positive for individual consumer households. Consumers, like their business and banking counterparts, would be well-served to de-leverage by spending less, saving more, reducing their use of credit, and thereby strengthening their personal balance sheets. While this may not provide the immediate-term returns to the economy of the over-leveraging of recent years, a financially stronger U.S. consumer implies only good things for the longer-term well being of both the U.S. and global economies.

We look forward to how tomorrow's retail numbers are spun by the appropriate authorities (and Merrill Lynch) in hope of preventing the broader population from realizing that the old consumer spending patterns are as over as securitization.

h/t Geoffrey Batt