As recent reports signal a new low in American morale, a report released by Boston Consulting Group (BCG) indicates that consumers may combat the blues by spending big where it feels good, and skimping where it does the least damage, financially and emotionally.

This consumer spending pattern has created a “trading up/trading down” trend, which has created diminished spending on “middle” market items. “Consumer spending in the U.S. on premium, ‘trading up’ products and services hit $720 billion in 2006, up from $670 billion in 2005,” (“'Trading Up' Spending in U.S. Crosses $700 Billion, as Consumers See Premium Products as Salve for Life's Challenges, According to New Boston Consulting Group (BCG) Research,” May 22, 2007, PRnewswire).

"Americans have always been smart spenders, and they're getting smarter. They know how to identify the premium products that will meet their emotional needs and offset the challenges of life. To afford those products, the ones that mean the cost, quality items and services," said consumer economy expert and BCG Senior Partner Michael J. Silverstein, author of the bestselling Treasure Hunt: Inside the Mind of the New Consumer (Portfolio, May 2006) and Trading Up: Why Consumers Want New Luxury Goods - and How Companies Create Them (Portfolio, 2004).

Trading up expenditure accounted for 21% of the $3.5 trillion Americans spent last year on homes and home renovation, as well as luxury items and services such as travel, entertainment, dining out, personal care, apparel and fashion, and home goods. In 2005, trading up accounted for 20% of consumer spending, and for 18% in 2004, demonstrating an upward trend. This was reflected in a surge in business for companies comprising the “Trading Up Top 10”: Coach, Nordstrom, Limited Brands, Inc, Whole Foods Market, Inc., Tiffany & Co., Neiman Marcus, Brinker International, Williams-Sonoma, Saks and Cheesecake Factory. Over a ten year period, sales for this group have skyrocketed, bringing in a market cap of $68.4 billion at the end of 2006 versus $14.9 billion in 1996.

Simultaneously, the trading down market grew, as bargain hunting got big, creating a phenomenon known as “market polarization.” In 2006, trading down comprised $1.2 trillion in sales, up from $1.1 trillion in 2005. Like trading up, trading down followed a steady upward trend over the past 2 years, accounting for 33% of discretionary spending in 2006, 32% in 2005, and 31% in 2004. The “Trading Down Top 10” consists of Wal-Mart, Home Depot, Target, Lowe's, Costco, Kohl's Corp., Staples, TXJ Companies, Dollar General and Family Dollar. Again, numbers demonstrate a huge jump in sales for this group, with sales at a whopping $459.1 billion at the end of 2006 compared with $109.2 billion in 1996.

Sales of items and services caught in the middle have diminished. “Middle market” sales have suffered a downward spiral, accounting for 46% of spending in 2006 versus 48% in 2005, and 51% in 2004.

Silverstein explained, "Many companies are meeting, and even driving, the challenge from consumers. The best of these companies have created a regular cycle of innovation for premium-priced, 'trading up' products or, on the other side, learned how to relentlessly drive costs down and still offer products that are good and satisfying. Other firms, however, remain mired in the middle, a shrinking market."