'Wealth Effect' Buoys Sales of Yachts and BMWs
Stock-market boom creates flushest times for sellers of luxury goods since the Reagan era.
America's "carriage trade" - the sale of luxury goods and services - rumbles louder than it has in years.
Despite some recent dips in their paper wealth, stock investors still enjoy the best stock gains since the Reagan era. Millions of Americans are richer. And some are deciding to enjoy their new wealth by spending a chunk.
"Our business has never been better," says Robert Healey, chairman of Viking Yacht Co. in New Gretna, N.J. "We are selling everything we can build."
The maker of $500,000 to $3 million motorboats is back-ordered into next year.
That's one sign of what economists describe as a "wealth effect." The booming stock market and healthy economy have given many Americans a much greater feeling of prosperity.
Sales of fancy cars, expensive new homes, air charters to vacation sites, costly jewelry, quality furniture, and designer clothing are bustling.
The times may even be better for the well-to-do than the gold-plated years of President Reagan's second term.
"The stock market didn't rise as fast then," notes economist Cynthia Latta, of DRI/McGraw-Hill, a Lexington, Mass. consulting firm. Economic growth was speedier in the recovery of the 1980s, but interest rates and inflation were also higher.
Today, the rich rack up a bigger proportion of the nation's income and wealth than in the 1980s. The salaries of corporate executives and those at the top in sports and other professions have soared to unprecedented highs in what some call the "winner-take-all economy."
Some of the prosperous prefer just to accumulate their new wealth, say for retirement. But others feel flush enough to use a portion of their income or investment profits to buy something they want. This may be just more meals out. Or it could be something major. This wealth-stimulated consumer spending is the "wealth effect."
For at least some of those selling luxury goods, today's business outstrips that of Reagan era.
"This is one of the best years we have seen in 16 years," says John Warrington, who sells yachts in Beaufort, N.C.
"Hey, when stocks and bonds are up, brokers have more expendable income," says boatbuilder Healey. "And they are spenders. These are not the kind of guys who stick their money in the bank. They want to enjoy life."
But Healey's ebullience is not shared by the entire recreation boat industry. Sales of boats with inboard engines, which tend to be in the luxury class, are well up from last year but about half that in 1989, according to the National Marine Manufacturers Association, Chicago.
Economists have a hard time calculating the wealth effect. Some can't even find one. It is difficult to separate the wealth effect from the impact on spending of growing incomes.
But economist Joel Prakken figures Americans are now spending about 3.5 cents of every additional $1 of wealth. Though that ratio is little changed from the 1980s, the amount of wealth is far greater.
"We have certainly noticed the [wealth] effect," says Thomas Murphy, general sales manager for Lexus of Norwood, a dealer in suburban Boston for the Japanese-made cars with sticker prices ranging upward from the low-$30,000s to $60,000.
The dealer's sales are up 30 percent from last year.
Nationwide, Lexus is getting a 40 percent jump in sales.
"There is a good likelihood that the stock market is one factor," says Murphy. "When a customer comes in trading a 1994 Ford Taurus, something must have taken a turn for the better."
Overall value of listed stocks has risen from $4 trillion in 1994 to about $7 trillion now, notes Arnold Markowitz, a financial economist based in Palm Beach, Fla. Mutual funds have seen their assets rise $4 trillion in five years, about half from an inflow of new money, half from capital gains.
"People have the ability to cash in some of those gains," says Dr. Markowitz. And with the drop in the federal tax rate on capital gains to 20 from 28 percent, he expects more investors to use some of their new wealth to make major purchases.
"Eighty percent of it you get to keep," he notes. "This is an important stimulus for people to take money out of investments."
Moreover, the new wealth, low unemployment, and prosperity have raised consumer confidence to a 30-year high.
At a bridal boutique on fashionable Newbury Street in Boston, sales of designer Tatiana's $2,000 to $5,000 wedding dresses are brisk.
"We have hired an extra person to help out," says store manager Irene Grassby.
Saks Fifth Avenue clothing store sales in the latest quarter were up 11.3 percent from the year before - led by "continuing demand for luxury and designer goods," according to chairman Philip Miller.
With more Americans reaching 50, demographics are "favorable" for luxury sedan sales, says Susan Jacobs of Jacobs & Associates, a consulting firm to the auto business in Rutherford, N.J. She also sees husky sales of coupes, roadsters, and luxury sports cars.
Cadillac sales are up 6.3 percent so far this year.
Mercedes-Benz sales have risen 23.5 percent in North America. "We are having a fantastic year," says spokesman Stuart Schorr. For the first time, the German firm expects to sell 100,000 cars on this side of the Atlantic. Prices run from $30,000 to $133,000,
Record at BMW
BMW, another German maker of luxury cars, broke the 100,000 sales mark in North America for the first time last year. And sales are breaking records again this year, says spokeswoman Martha McKinley.
At Tiffany & Co.'s Boston store, manager Anthony Ostrom notes that the booming mutual fund business - an industry centered in Boston - has provided a "positive environment for our business."
At the New York headquarters of the jewelry store chain, spokesman Mark Aaron, says sales at the same stores were up 11 percent last year, and 7 percent in the first quarter of 1997.
Some people use their new wealth to buy multiple homes. Merry Coolidge, a real estate agent in Naples, Fla., reports an active market for $3 million to $5 million second or third homes in the prosperous community.
At King AirCharter Inc. in Lawrence, Mass., dispatcher Jon Busineau says his company's two executive jets and one turbo jet are flying practically every day for corporate or individual customers.
Until the latest revision of the national accounts, the wealth effect's impact on consumer spending was hard to measure - though anecdotal evidence in specific luxury markets abounded.
Now the numbers show that consumers, feeling flush with new wealth, are saving less from their paychecks. The personal savings rate in the last quarter was 4.2 percent, compared with 5.1 to 5.5 percent in the late 1980s.
Savings tend to peak in a recession, then fall off as a recovery brings more income, more wealth, and the wealth effect.