While the Rich Splurge, the Rest Hold Back - Shobhana Chandra and Anthony Feld

Wealthy shoppers are bolstering the recovery—and masking the reluctance of many less affluent Americans to join in. Sales are up at Tiffany (TIF) and Coach (COH), thanks to demand for $6,000 diamond pendants and $1,200 leather handbags as a stock market surge pads the wallets of the rich.

At the other end of the economic spectrum, Wal-Mart Stores (WMT), the world's largest discount retailer, reports that many of its customers are still living paycheck to paycheck as they await an improvement in job prospects. That means they stick with the essentials. "Financial uncertainty still weighs heavily on everyday Americans," said Mike Duke, the Bentonville (Ark.) company's chief executive officer, in a Nov. 16 conference call with investors.

Those ordinary Americans who have jobs worry about holding onto them, and they expect few if any increases in pay as the recovery inches forward. For upper-income households, it's a different story, says Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase (JPM) in New York: "They're the ones benefiting the most from the stock market rally, and they're spending."

Consumer spending accounts for about 70 percent of the economy, and the uneven pattern in household expenditures helps explain why Fed policymakers will likely keep interest rates near zero while carrying on with a second round of Treasury purchases aimed at getting credit flowing again. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed. Feroli estimates the top 20 percent of income earners account for about 40 percent of spending. Dean Maki, chief U.S. economist at Barclays Capital (BCS) in New York, puts the figure at closer to 50 percent.

High-end retailers led the increase in December sales at stores open at least a year, company data showed on Jan. 6. The Bloomberg Retail Sales Luxury Index of U.S. sales revenue jumped 8.1 percent from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9 percent rise. Purchases made in the third quarter with American Express (AXP) credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, which was reached in 2008.The combined total for Visa (V) and MasterCard (MA) didn't experience a similar rebound, according to company data.

The U.S. lost about 8 million jobs during the recession, and Fed Chairman Ben Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption. In the meantime, rising stock prices signal that rich shoppers will retain an edge in driving spending. The top 20 percent of income earners account for about 80 percent of equity wealth and half of housing wealth, Maki estimates.

The Standard & Poor's 500-stock index has almost doubled from its March 2009 low. On top of that, President Barack Obama on Dec. 17 signed into law a bill extending Bush-era tax cuts for all income groups, instead of letting them expire for families earnings more $250,000 a year, the cutoff the Administration uses for the middle class. "It's striking," says Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. "Most of the rest of the country is still suffering while the wealthy seem to be largely insulated. You would think they wouldn't have all that much to complain about. Instead, they've had unending criticism for the Obama Administration."

Sentiment data reflect the stock market gains. The Conference Board's Consumer Confidence Index for households making more than $50,000 a year hit a 33-month high in January, while the gauges for households earning under $50,000 a year are still below their levels of last May. Rising foreclosures and declining real estate values indicate middle- and lower-income households will remain cash-strapped. The asset value of property held by Americans fell by $649 billion in the third quarter, to $16.6 trillion, the Fed said on Dec. 9. Home prices may drop as much as 11 percent through the first quarter of 2012, which would leave them 36 percent below their 2006 peak, according to a Dec. 8 Morgan Stanley (MS) report.

For companies that cater both to the well-off and those of modest means, the divergence is striking. There's been "a greater bounceback in the more affluent customer," says Clarence Otis, chief executive officer of Darden Restaurants (DRI). The Orlando company owns casual-dining chains such as Red Lobster and Olive Garden as well as the upscale Capital Grille steakhouses. On a Dec. 21 conference call with investors, Darden's chief operating officer, Andrew Madsen, noted that "less affluent guests who tend to have a lower check are reducing their restaurant visits."

Maki, for one, expects consumption patterns to normalize as the year moves forward. "The labor market recovery will become more widespread as we go through 2011, which should take away some of the imbalance" in purchases, says the economist, who specialized in researching household finances at the Fed from 1995 to 2000. "We definitely expect to see some catch-up in spending by middle- and lower-income households. It's one of the ways the recovery will become more entrenched."

The bottom line: Strong Christmas sales numbers obscure the discrepancy between increased shopping by the affluent and cautious spending by the rest.