When Top Earners Snap Their Wallets Shut, We All Feel It

Affluent Consumers' Hesitation to Splurge on Luxury Goods Made a Dent in the Economy

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CHICAGO (AdAge.com) -- Earlier this year, The Onion ran a story headlined "Rich Guy Feeling Left Out of Recession." Turns out the article had more truth than most that appear in the humorous paper. This recession hit Americans in very different ways but the affluent, while not totally immune, felt far less impact than most consumers.

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Income on the Rise
You hear this number so often, you start to get used to it: Half of all income in the U.S. is earned by just 20% of households. That's up more than 10% in the last 20 years. Nearly three in four dollars are earned by the top 40%.

Here's a number you don't know: There was a 5.2% drop in households earning more than $100,000 between 2008 and 2009, according to the latest Census Bureau statistics.

Considering that this group accounts for 38.5% of total consumer spending, losing 1.2 million of them is the kind of bump the economy feels. The affluents spend an amount nearly twice the median household income for the U.S. as a whole. To put it in perspective, to lose that much spending power from the bottom 20% of earners, it would take a consumer population roughly the size of Wisconsin.

Who are the affluents and where do they get all this money? They live in larger households and are slightly more likely to have children under 18 in the house. The household heads are pretty evenly split between men (56%) and women. They are dual-income households. Almost all of them own at least one car (average is 2.8), 89% of them own a house and 84% graduated from college. Most (80.6%) are non-Hispanic whites, but that number and the number of black households decreased as the percentage of Hispanic households in the upper bracket rose to 6.6% in 2009.

Besides the half-of-all-income, they pull in an eye-opening 73% of self-employment income and 64% of interest, dividend and other investment-related income. They're not collecting much Social Security (only 18% of pay-outs) but contribute 55% to the system and other pensions. They pay 73% of total personal taxes, down from 89% in 2008, when they had more capital gains to tax.

The economy notices when they slow their spending because these consumers spend a lot of money. Like $2.3 trillion a lot. In fact, of all the product categories tracked by the Bureau of Labor Statistics, they are outspent by lower-income groups in only three segments: car insurance, rent and tobacco products.

So it's been rough on the goods that only they buy. Of the top 100 boat dealers who reported figures to Boating Industry, 80% saw sales slip in 2008. Last year wasn't a great year for the ultra-high-end car market, either. Sales of the segment fell nearly 40%, according to Automotive News and data provided by R.L. Polk & Co. That's twice as fast as the industry decline. Still, 6,700 new units sold.

"The majority of the customer base is staying in their cars longer or buying out their leases," said Jon Boardman, general manager-sales operations of O' Gara Coach Co., Beverly Hills. Perception might be part of the rationale behind choices like that -- not wanting to appear too flagrant about your continued wealth. For the customers buying new cars, however, they still tended to opt for the lamb's wool rugs and Moccasin leather interiors. "If you're buying a car that's $250,000, there's really no difference between the lower end at $230,000 or the fully-loaded $270,000," said Mr. Boardman.

The market for luxury goods, which has been generally trending upward since the mid-90s, dropped 8% in its "worst year ever," according to Bain and Co. It's rebounding quickly and Bain projects it will be up 4% this year. Department store sales, according to IBIS World, continued their slide, with sales falling 9.5% in 2009. Consumer electronics had two straight years of declines and are projected to be nearly flat in 2010.

The economy also notices when they start spending again because they buy more than just luxury goods. Moody's Analytics believes much of the economic growth at the end of 2009 and start of 2010 was fueled by the affluents and their spending. That hit a snag in the second quarter when the markets took another fall, impacting the heavily invested high earners and likely causing them to pull back again.

"Their net worth went down with the value of their homes; their optimism dropped, so I'm not surprised they cut back," said Bob Shullman, president of Ipsos Mendelsohn, which conducts the only major consumer survey of this demographic. "But the affluents still have the wherewithal, much more than the rest of American, to resume spending once their optimism returns."

And the optimism is returning, according to the Ipsos Mendelsohn survey. Looking at those who plan to take a vacation abroad, the figure dipped in 2009 to 28% but has crept back up slightly in 2010 to 29.3%. The survey also found a big increase in plans to buy or lease a car, move, have a baby, redecorate and remodel their homes.

Income doubled for the top group between 1979 and 1989 and has doubled again since then. For the bottom 20%, it's been a slower pace. It took from 1974 to 1986 to double and has barely doubled again since then to $11,500. In constant dollars, income has increased 28.6% for the bottom 20% since 1967 but 70.7% for the top quintile and almost 90% for the top 5% of earners. This is not a trend that looks to reverse itself any time soon.

Their income fell less than that of other income groups -- just 0.6%, compared to the lowest earners, who saw wages fall 4%. The affluents only cut their average spending in 2009 by 2.8% -- also less than most other income groups -- but increased their share of spending slightly.

For those marketers going after the affluent, the good news is that they consume a lot of media and that different age groups consume it differently. So you can reach them and be on their radar as their spending picks back up.

They are pretty much all online, and watch an average of 18 hours of TV a week, with local news leading the way for most age groups, according to the latest Ipsos Mendelsohn Affluent survey. They also read a lot of magazines, though less than they did in 2009. Thirty-one percent read a blog, which is way below recent eMarketer figures for the general population. About a third of them own smartphones, and those consumers are even easier to reach. They are far more likely to consume just about any form of online and offline media. The e-readers and tablet users among them are, not surprisingly, the biggest media consumers of all, although, oddly, the tablet users aren't really into blogs or texting. Digitas recently analyzed this and other data on the affluents and noted that while the smartphone use for functional purposes beyond texting and email is still relatively small, various uses from checking stock quotes, researching restaurants, reading news and sports scores is increasing rapidly.

The bottom 20% of earners pull in 3% of total income, yet they account for 9% of spending. They are three times as likely to be black and twice as likely to be Hispanic than the top 20%. One in 10 never went to high school and 40% fewer have a college degree than their high-earning counterparts. According to the Center for Labor Market Studies at Northeastern University, the bottom earners were over 12 times more likely to be underemployed than the top earners.

The economy is hitting savings unequally, too. Forty-eight percent of blacks polled in an Ariel Investments Black Investor Survey said that they had pulled money out of their savings to make ends meet in the past two years, vs. 31% of whites. Also, blacks are nearly twice as likely as whites to have reduced their contributions to 401(k) plans.

Introducing Advertising Age's MarketFinder

Quick: How much did the average 55- to 64-year-old spend on housekeeping supplies in 2009?

Stumped? It's a question easily answered with MarketFinder, an interface Ad Age has custom-designed for marketers and agencies to access data from the Census Bureau and Bureau of Labor Statistics. Using MarketFinder, you can examine national data down to the metro area and across age, gender, household type, race and ethnicity, education level and income. Pitching new business and need to get up to speed in a hurry? We'll get you the data you need and even allow you to export it into PowerPoint-ready graphics.

In addition, MarketFinder users get access to Ad Age and American Demographics stories related to consumer trends. The tool, launching next month, will show the most relevant articles to your specific searches so you will find not only data, but insights. Ad Age will give you the context surrounding the numbers as well as customized tips on how to use -- and the limitations of -- the facts, figures, tables and graphs. Of course, you'll get the raw numbers, too.

Now, the answer to that housekeeping products question: $825, far more than any other age group. Homeowners -- especially those in rural areas -- vastly outspent renters in this category. The Philadelphia and Dallas metro areas have large concentrations of householders in this age range. Additionally, the highest earners account for 35% of all spending on housekeeping supplies in the U.S., so that might be a good market to target as well.

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