Money Talks: "The Consumer" Is Not Monolithic - Income Is a Proxy for Economic Recovery Status

Recent economic data have clarified the anecdotal evidence; wealthier Americans are doing much better than their middle and lower-income brethren. Income bracket has become a proxy for how one is recovering from the financial crisis and recession. The better off you are, the better you are doing. For businesses, this means the better off the customer you serve, the better are your future prospects - at least in the short to medium term. For their part, policy makers appear to have decided that the political benefits of budget-cutting rhetoric (and maybe even actions) are more important than the longer term economic benefits of stimulating consumer demand. In the meantime, the demographics are clear -whether you are a consumer goods marketer or a political pollster.

Kelly Evans considers the evidence in the Wall Street Journal's Review of the Tape column:

"It's impossible to talk about the U.S. consumer anymore without clarifying which one.

Broadly speaking, there are three types nowadays: the upper-income investor, the middle-income homeowner, and the lower-income worker. Disparities among their wealth and prospects have widened following the Great Recession. That is also opening up a performance gulf between companies catering to each group.

This won't be readily apparent in data like the retail-sales report Tuesday. The Commerce Department is expected to say total retail and food-service sales in January were up 0.6% from December and nearly 8% from the previous year. That strength tallies with January chain-store sales figures that beat both expectations and lousy weather to post a nearly 5% year-on-year increase.

But gains aren't evenly shared. Improving confidence and spending among upper-income consumers is fueling much of the rise, with a helping hand from the stock market. Confidence among those with annual household income of more than $50,000 has risen by nearly 50 points from its March 2009 trough. Last month, with the S&P 500 enjoying its strongest January in five years, Neiman Marcus and Nordstrom led sales gains among retailers. For the middle swath, there is a tug of war between improving confidence and the threat of another downdraft in home prices.

It's a grimmer story for lower-income households. The labor market's recovery has been painfully slow. Confidence among households making less than $35,000 is up only 20 points on average from its low, according to the Conference Board. The Obama tax plan may have cut payroll taxes and kept rates in check for the wealthy, but by eliminating Making Work Pay tax credits it seems to have left many lower-income households worse off.

Add in rising food and energy costs and cutbacks to government assistance, and "we actually expect this group's discretionary income to decline" in 2011, says Don Palmer, global consumer strategist at Fortress Investment Group. That means trouble for the likes of dollar stores or Wal-Mart Stores Inc., which was downgraded by J.P. Morgan analysts Monday.

Betting on "the consumer" may still be a sensible investment and business strategy—in emerging markets. When it comes to the U.S., only the wealthy are re-emerging from the crisis with real vigor.