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Will luxury cool off?
Report says wealthy shoppers will feel the pinch of higher taxes, slowing growth of home prices.
March 9, 2005: 1:30 PM EST
By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Here's some bad news for red-hot high-end sellers like Nordstrom, Neiman Marcus and Saks: Their run is coming to an end.

At least that's what Deloitte & Touche is predicting. According to its research arm, the strong housing prices and dividend returns that kept wealthy consumers in the high-end aisle are going to disappear.

Instead, a rising tax burden and "the declining pace of growth in [median] home prices will limit purchasing power for higher income households," said Carl Steidtmann, chief economist for Deloitte Research and author of its monthly Leading Index of Consumer Spending.

The index tracks tax burdens, real wages, real home prices and initial unemployment claims as a gauge of future consumer spending.

But while the well-off will wrestle with the effects of a real estate slump, improvements in real wages should benefit low-to-middle income shoppers. That, in turn, should boost spending at the discount level, giving a boost to retailers like Wal-Mart (Research) and Target (Research), the report said.

"Continued job and real wage growth is needed to increase a household's pool of cash and to strengthen discount retailers' sales," Steidtmann said. "An improved labor market would make consumer spending more self-reinforcing and less dependent on tax and interest rate-related stimulus."

"What this report said is exactly what I've been talking about since December," said Michael Niemira, chief economist and director of research with the International Council of Shopping Centers (ISCS).

"My concern is that the luxury market has topped in terms of spending growth after a two-year upturn," said Niemira.

No doubt, consumers' long-standing love affair with pricey products has made stocks of high-end players such as Neiman Marcus and Nordstrom favorites on Wall Street.

Shares of Neiman Marcus (Research) last year rose 34 percent while Nordstrom (Research) shares jumped 36 percent in 2004.

"Luxury has a strong run and it will slow down in 2005," Niemira said. "This is more a function of the natural rhythm of retail spending."

Regarding the discount sector, Niemira believes improvements in the labor market rather than in wages "which we haven't seen the effects of yet," will be the catalyst for an up tick in spending.  Top of page

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