Luxury Durables do well in Uncertain Times

In economics lessons we are taught that, in a recession, the aggregate demand curve shifts inwards as consumers skimp. Specifically, we are told that the reason for this is that consumers spend less on luxury goods, purchasing only what they need. However, consumer behaviour following the recent downturn challenges that view. High-end electronics manufacturer Apple saw its net income jump by 94% in the last quarter and Mercedes-Benz is experiencing a record sales year with sales up 15.2% from a year earlier. Other luxury car manufacturers like Lexus and BMW are experiencing similar gains.

What seems to be happing is that consumers are investing in durable goods which will give them tangible joy. As Dan Ariely, professor of behavioural economics at Duke University says, “If they lose money by spending it on something, at least they have something to show for it.” Consumers are confused by the recent capricious state of international markets with news of booms in some sectors contrasting with warning signs in others and fears of a double-dip recession. Ariely says that such gyrations in the market make people want to spend on goods rather than bet on mutual funds.

Funnily, while people are splurging thousands on cars, top-end toiletries are suffering. This only supports the view that consumers place great value on durable goods in uncertain times. The outlook, therefore, is great for top-end durable goods manufacturers. Not only do they capitalise on greater incomes in boom times but on uncertainty in less bright economic conditions too!