Big Spenders Are Reluctant to Shop Through the Drop

Buoyant consumers have been the stabilizing force in an otherwise wobbly economy, but the stock market’s current nose dive is raising questions about how long that can continue.

Retailers of luxury goods and services say they already are feeling the pinch of the market downturn, and economists fear the pain may spread.

“If the stock market continues to fall, it will affect everything, including houses and sales of consumer goods in general,” said Sung Won Sohn, chief economist for Wells Fargo & Co. “None of us will be escaping the effects of the stock market plunge. Even if the stock market bottoms, the effect will linger on for a while. And the higher the price tag, the greater the effect.”

The latest retail sales figures reported by the government show spending was up slightly in June compared with last year, but some merchants say they are seeing a change in spending habits.

“Where people were upgrading, upgrading, upgrading before, oblivious to cost, they are now trying to work deals and pinch pennies like you’ve never seen,” said James Ahern, a travel agent specializing in adventure safaris and international cruises at First Class Travel in Phoenix. “And these are people who have the money. I know they have the money.”

At Melisse, a French-American restaurant in Santa Monica where the average dinner check per person is $85, reservations are off by 20% this week, said general manager Michael Morrisette.

“I think people are getting a little scared and thinking twice before going out to dinner,” he said. “Maybe instead of going out three or four times a week, they’re eating out two times.”

The shaky economy and tumbling stock market have led Hildegard Scolari, 65, of Newport Beach to cut back on shopping and travel.

“I can’t spend money that I no longer have,” said Scolari, a retired fashion industry executive who is invested heavily in the market.

Yacht dealer Gordon Barienbrock certainly wasn’t glad to hear that the stock market had slid an additional 234.68 points on Monday. To cope with slackened demand, he said he has been forced to cut prices.

“The sale of luxury yachts is generally directly correlated to the stock market,” he said. “When you buy boats like that, you have to feel rich.”

The luxury market aside, however, some economists dismiss the idea that the market downturn will make a big dent in overall consumer spending, which accounts for two-thirds of the U.S. economy.

“Despite the democratization of the stock market, most households can’t tap into the market, either to take advantage of gains or curtail losses, because most of it is locked up in mutual funds or retirement programs,” said Carl Steidtmann, chief economist with Deloitte Research in New York. “At the end of the day, what drives consumer spending is cash flow, and the factors that affect cash flow are pretty positive right now.”

Indeed, consumers have shown surprising resiliency. As the economy slowed last year--and took a staggering blow on Sept. 11--shoppers simply hastened the trend away from higher-end department stores and shopped more at discounters such as Wal-Mart and Target.

Some big retailers on Monday said trends so far this month are pointing to lower sales for July than last year in stores open at least a year.

Federated Department Stores Inc., parent company of Macy’s and Bloomingdale’s, said that based on monthly receipts so far, July sales are likely to be flat to slightly down.

J.C. Penney Co. said decent sales last week at its department stores put the division at the higher end of the company’s forecast for July--which is 2% to 4% below July of last year.

Although retail sales in June were up by 1.1%, according to Commerce Department figures, the unexpected increase was mostly a result of pent-up demand after a weak May, economists said.

In another indicator this month that discretionary spending could be weakening, Tweeter Home Entertainment Group Inc., which sells mid-range to high-end consumer electronics products, said sales at stores open and under its ownership at least a year dropped 4.6% in the quarter ended June 30.

Tweeter’s chief financial officer, Joe McGuire, blamed weaker June sales on the “major moves” in the stock market.

Tiffany & Co said it expects earnings to be at the low end of its previous expectations. And Zale Corp., the nation’s largest specialty retailer of fine jewelry, said it expects established store sales to be essentially flat this quarter, up a mere 1% to 2%.

C. Britt Beemer, chairman of the Charleston, S.C.-based America’s Research Group, a consumer behavior strategic marketing firm that surveys 10,000 to 15,000 consumers a week, said the market tumble and sour economy won’t change how much Americans buy but how much they are willing to pay for it.

“When their children need clothing for back to school, consumers are doing it, they’re just going to different places,” Beemer said. “The biggest beneficiaries of the stock market decline have been Wal-Mart and Target because consumers are still buying; they’re just going to places where they think they can save 10% or 15% more.”

Wal-Mart, the world’s biggest retailer, said it probably will better last July’s sales by 5% to 7% in stores open at least a year. Still, even at Wal-Mart, consumers aren’t splurging. For the week ended July 19, the company said, basic commodities were the key sales drivers.

Economists say key economic indicators that underpin consumer spending haven’t fallen apart as quickly as the stock markets--but that they aren’t accelerating either.

Real wage growth slowed through the spring to 2.2% in May, down from 3.3% in January but slightly ahead of April, according to Goldman Sachs.

Housing turnover remained high in May at 7.9%, with mortgage purchase applications up 21% in the most recently reported week, on the basis of continued low interest rates. But those numbers, which have been strong since just after Sept. 11, are likely to fall eventually as interest rates rise.

Consumer credit could be another cause for concern, economists say, as debt service payments, as a portion of disposable personal income, remain close to all-time highs. That could mean more limited capacity for the kind of borrowing that fuels consumer spending growth, economists at Goldman Sachs say.

Although real estate in California and the U.S. has been riding high from a wave of willing buyers, housing could suffer if the stock market remains mired in a slump and causes the U.S. economy to lapse into another recession, known as a double-dip. That could cause consumer spending to plunge and job growth to decline.

“At some point, people won’t have money to put into real estate,” said David Lereah, chief economist at the National Assn. of Realtors, a Washington trade group.

John Karevoll, an analyst at DataQuick Information Systems Inc., a LaJolla firm that monitors real estate trends, said the shaky stock market could lead to more money going into real estate.

But top-end housing is the most volatile, subject to greater gains and greater declines than less expensive units, and some owners who have sold their homes believe luxury real estate could be headed for a correction, brokers said.

“They look at their home and realize the same effect could happen,” said Rick Edler, an agent at Remax Palos Verdes Realty.

Cecelia Waeschle, a Beverly Hills real estate broker, said wealthy consumers may balk at plunking down money as freely as they did when their stocks were soaring.

“We just have to wait and see.”

Times staff writers Bonnie Harris and Daryl Strickland contributed to this report.