High-end consumers are spending big, a sign the economy is back
By Matt Stearns
Knight Ridder NewspapersWASHINGTON - If you sell to the wealthy, the economy is booming.
Jobs may be going overseas and consumer confidence may be running low, but as the presidential campaign heats up debate on the economy, one thing is certain: It's good to be rich.
Nationally, new boat sales were up 9.5 percent in 2003, the first increase in two years, said Thom Dammrich, president of the National Marine Manufacturers Association. Many sales were to existing boat owners who were trading up to bigger yachts.
"These people don't even know there's a recession," said Chan Moser, a yacht broker in Stamford, Conn. "The interest rates are low. They don't give a damn. You should see what's being built."
At the Hinckley Co., whose Maine-made semicustom boats range from 29 to 70 feet and cost from $300,000 to $5 million, the order backlog is bigger than it's been in years. "We're breathing a lot easier than we were," said Ed Roberts, Hinckley's vice president of sales.
"High-end retailing has revved up significantly in the last year," said Mark Zandi, chief economist at Economy.com. He cited a better job market for the well-educated, a rising stock market, increasing home values and lower taxes, especially for the rich.
"There's a lot more after-tax income for higher-income households," Zandi said.
Luxury-goods giant LVMH Moet Hennessy Louis Vuitton SA (which makes Dom Perignon, Fendi and many more brands in the if-you-have-to-ask-you-can't-afford-it class) has seen profits rise 30 percent in the past year. Its share price is up 42 percent.
Recent ads in The Wall Street Journal trumpet the advantages of partial private-jet ownership. Costs start at $4,600 a month for one-sixteenth of a jet, plus a $1,760 hourly flight rate and $6,485 in monthly management fees.
After 40 percent annual growth from 1995 until 2000, sales in partial private-jet ownership nose-dived 20 percent a year from 2001 until 2003, said Steve Phillips, the director of marketing for Bombardier Flexjet, a leading seller of fractional jet ownership. Now the perk is bouncing back.
"February was the second-best February we've had since we started in 1995," Phillips said. "That's obviously very encouraging to us."
About 80 percent of Bombardier's customers are people who own small companies. For these high-rollers, that stubborn unemployment rate is no bother at all.
The U.S. tax code encourages the well-to-do to dip into their assets.
Buy a million-dollar yacht with a bank loan and you can deduct the interest you pay on the mortgage - just like you can on your house. In fact, any boat that has a head, berth and galley (nautical-speak for bathroom, bed and kitchen) can get you that tax advantage.
Buy a share of a private airplane and get accelerated depreciation on the expense. Plus, you get to expense the hourly cost of the plane if you use it for business.
Tax breaks are also available to small-business owners of cars that weigh more than 6,000 pounds. So if you have your own business and can afford a Hummer H2 or a Cadillac Escalade, both of which have base prices of more than $50,000, you can write off thousands of dollars from the cost more quickly than on any other type of car.
A 2003 tax-code change allows small-business owners to deduct the cost of a vehicle weighing 6,000 pounds or more in gross vehicle weight. It can be fully depreciated in the first year, up to $100,000; the previous limit was $25,000. You must be able to prove the vehicle is for business use, according to the American Institute of Certified Public Accountants.
By contrast, in 2004, ordinary sedans can be depreciated only up to $10,710 the first year (up from $7,660 in 2003).
Fully depreciated means you can deduct that amount from your taxable income. This gives small-business owners an incentive to minimize their tax liability by buying a big, gas-guzzling SUV. It will cost the Treasury at least $1.4 billion over 10 years, estimates Taxpayers for Common Sense, a nonpartisan fiscal watchdog group.Many car dealers use that tax break as a selling point.
Sales of such super-sized, super-priced sport-utility vehicles are up 25 percent over last year and are vastly outpacing overall auto sales, which are up about 4 percent, said David Lucas, an analyst with Autodata Corp.
With new models such as the Porsche Cayenne (base price: $55,900) hitting the market, it's clear that automakers see potential for growth in the segment, Lucas added.
These buyers aren't at the low end of the scale.
"You don't see single moms with two kids buying Hummers," said Keith Ashdown, vice president of policy for Taxpayers for Common Sense. "It definitely is another case of a loophole in the tax code driving sales of a luxury item."
All this occurs against the backdrop of a presidential election. Opinions differ on the electoral significance of the splurge surge.
Republicans say the high-end spending is a sign of economic growth spurred by President Bush's tax-cutting policies, which they say have already - if fitfully - begun to create jobs. Bush says making his tax cuts permanent will fuel more growth and more jobs.
Democrats say the luxury boom signals that the tax code contains special breaks that widen the gap between the rich and everybody else. And since the recovery hasn't led to vigorous job creation, they hope voters will respond negatively.
A New York Times/CBS News poll of 1,206 adults taken in early March found that 54 percent of those polled thought the country was going in the wrong direction. Only 38 percent approved of Bush's handling of the economy. The poll had a margin of error of plus or minus 3 percentage points.
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