Commentary: Could `Luxury Fever' Make The Economy Sick?

Can we ever have enough? Personal spending keeps climbing, and this year will nearly reach the $6 trillion mark. In real terms, total consumption will grow by 4.7% this year, capping six years of annual gains averaging a healthy 3%. More noteworthy, though, is the fact that even in this age of discounting, purchases of luxury goods and services are growing at about four times the rate of overall spending, says Cornell University economist Robert H. Frank. And while everyone assumes that the rich and the near-rich spend on high-ticket goods, it's a phenomenon, says Frank, that in the 1990s has moved down the income ladder. More and more Americans, he argues in a new book by this title, have been gripped by "luxury fever."

It's an old saw, of course, that as incomes rise, luxuries become necessities. And it would be downright Scrooge-like to argue that such spending should be denied to people whose rising incomes now let them enjoy some pricey baubles. But the trend toward buying more prestige goods and services is troubling nonetheless. For some of the individuals who have taken to indulging, debt undertaken to finance spending may become onerous. And for the economy at large, spending on luxury items by all income groups may turn out to be highly discretionary--easily forgone in the time of a downturn. Just how long can this high-powered spending last?

For now, there's no end in sight. The baby boom generation is in its peak earning and spending years. By 2000, predicts Edward E. Yardeni, chief economist at Deutsche Bank in New York, 35-year-olds to 54-year-olds could account for as much as 65% of personal income in the U.S., up from about 52% today. Increasingly, that income goes toward expensive goods, in part because those are the goods that people perceive to have value--both intrinsic and social. Luxury-brand vehicles, for instance, have been strong sellers and should gain 5% to 6% in volume next year, even though overall car sales are expect to slow, says auto consultant Christopher Cedergren of NexTrend in Thousand Oaks, Calif.

Americans are feeling flush both because of rising incomes and soaring asset values. The seemingly unstoppable stock market has fattened portfolios, and housing prices have also done quite well, thank you. This growth in household net worth has added about $120 billion to overall consumption levels since 1995, Goldman Sachs economists figure. Dormant inflation and an accommodating Federal Reserve Board in the wake of last summer's financial crisis also have loosened purse strings. To stop this trend, "you would have to materially change people's expectation of the future," says Gail Fosler, chief economist at the Conference Board.

But there's a downside to that spending pattern. The savings rate, albeit an imperfect measure, has dipped into negative territory. Consumer credit outstanding is growing at a 4.5% annual rate. Personal bankruptcies, meanwhile, surged nearly 6% in the 12 months ended on Sept. 30.

Most important, those people who seem best positioned to keep spending--those 35-to-54-year-olds--have no guarantee that their financial cushion will continue to be there. The stock market's retreat in the late summer and early fall didn't spook consumers. But a sustained bear market most certainly would. That would slow not only luxury fever but the economic growth it was fueling.