As consumers in the U.S. and China close their wallets amid a tight “tariff confrontation” and economic instability, companies in both countries are having mixed feelings by industry. In the U.S., the aviation and department store industries plunged as the “asset effect” that leads to consumption hit its limit, and in China, high-end restaurants and jewelry companies with high unit prices are suffering from sluggishness, while industries that pay attention to “cost-effectiveness” such as low-cost coffee and outlets are showing growth. According to a report by the Nihon Keizai Shimbun on the 1st, Bank of America analyzed the usage data of its credit and check card customers for a week until the 17th of last month, and found that the total amount of use fell 0.7% year-on-year, airlines fell 10% and department stores fell 12%. It is an industry that mainly provides expensive goods or services, which means that consumption among high-income people in the U.S. has decreased. Tony Spring, CEO of Macy’s, a U.S. department store chain, lowered his earnings outlook, saying, “High-income consumers are more selective about spending.” Expedia, a travel platform company, also lowered its earnings outlook, saying demand in the U.S. fell short of expectations.
This phenomenon can be attributed to the so-called “reverse asset effect,” in which consumption shrinks in conjunction with a fall in stock prices. Strong stock prices → More consumption → More corporate earnings → Concerns are growing that the virtuous cycle of the strong “asset effect” will reverse. Consumption of high-income earners accounts for a significant portion of the U.S. According to Moody’s Analytics, the top 10% of income earners account for half of all consumption, and their consumption is based on rising asset values such as stocks and real estate. However, the S&P 500, the leading U.S. stock index, fell nearly 20% from its peak after the “mutual tariff” policy announced by U.S. President Donald Trump in April. Since then, the stock market has rebounded as the U.S. and China have tentatively agreed to cut tariffs, but stock prices in high-end consumer goods and leisure-related industries are still sluggish. In fact, the stock price of the luxury furniture chain “RH” has fallen by nearly half compared to the end of last year, and the stock price of Macy’s has also fallen by more than 30%. Investment experts say, “It is difficult to actively invest in selective consumer industries such as entertainment.” Regarding this, Nikkei pointed out, “If the virtuous cycle of rising stock prices and expanding consumption stops, it will inevitably have a negative impact on the overall U.S. economy.” Some predict that consumption of some durable goods such as automobiles, as well as leisure and high-end consumer sectors, will be adversely affected. The situation is no different in China. In the aftermath of the economic downturn and the real estate market slump, consumers are focusing on “cost-effectiveness,” which means “satisfaction with the price.” The trend was evident in the performance of Chinese consumer-related companies in the first quarter of this year. While high-end restaurant companies and jewelry-related companies suffered from poor earnings, low-cost coffee chains and outlet stores recorded growth. “Exhodeok,” a high-end restaurant famous for its Peking duck, saw its sales drop 7% year-on-year. High-ranking officials’ crackdown on the entertainment culture and the economic downturn have dealt a direct blow to the demand for eating out. A restaurant official said, “Consumers are becoming more inclined to find popular and money-saving stores.” Jewelry brand “Ju Dae-bok” also closed 900 stores directly managed by mainland China within a year due to sluggish sales of gold jewelry. According to the China National Bureau of Statistics, retail sales in China increased only 4.6% year-on-year in the first quarter of this year, different from the previous 10% growth. The hotel industry is in a similar situation. Room utilization rate of luxury hotel brands was only 43%. Such consumption changes are leading to the advancement of low-priced brands. Chinese coffee chain Luixing Coffee saw its sales increase by 41 percent in the first quarter, far exceeding Starbucks’ sales growth rate (five percent) in China. Consumers are flocking to the coffee shop as the price is less than half and the taste difference is not that big. Outlet stores are also popular. Wang Fujing Group’s outlet division recorded sales growth of 4 percent. Besides, sales of China’s largest movie distributors also increased as movies were popularized as “cheap leisure,” while Shipper Group, a mid- to low-priced hotel chain, saw its main facility utilization rate rise 76 percent.
For Xi, improving personal consumption, which accounts for about 40 percent of the country’s gross domestic product, is a major task. In response, the National People’s Congress in March also cited expanding domestic consumption by boosting consumption as a key policy for this year. Although the government is implementing related policies such as subsidies to replace home appliances with new ones starting in 2024, some point out that this is nothing more than simply accelerating demand. “There are not enough signs that consumption will rise in earnest due to future anxiety such as unemployment rate of younger generations and social security burden caused by low birthrate and aging population,” the Nikkei said. He also warned that if consumers’ “low price orientation” worsens, China’s economy could lead to deflation. If consumption-related companies that value cost-effectiveness emerge in the wake of the economic downturn and price competition intensifies, they could follow in the footsteps of Japan, which has fallen into a “long-term recession” in the past.
SAM KIM
US ASIA JOURNAL
