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'Wealth Effect' Buoys Sales of Yachts and BMWs

Stock-market boom creates flushest times for sellers of luxury goods since the Reagan era.

By David R. FrancisStaff writer of The Christian Science Monitor / August 20, 1997


America's "carriage trade" - the sale of luxury goods and services - rumbles louder than it has in years.

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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."