Luxury stores have finally caught the economy's cold.

For months, high-end retailers posted healthy sales increases, thumbing their noses at dismal reports of slumping home sales, risky mortgages, and rising energy prices. But now it looks as though even well-heeled consumers are pulling back. On Jan. 10, the upscale department store Nordstrom (NYSE:JWN - News) said that December sales at stores open at least a year fell 4% from last year, compared with an 8.7% increase in November. Saks (NYSE:SKS - News), New York's Fifth Avenue luxury mainstay, also reported that its same-store sales were up a mere 0.8%, compared with a 25.7% increase in the previous month. And blue-blood retailer Neiman Marcus eked out a tepid 2.9% sales increase, vs. 5.8% in November and 8.5% in October.

"Everyone's shopping for the bare necessities, and people have stopped treating themselves," says Patricia Pao, founder of the Pao Principle, a New York retail consultant.

Discount Retailers Pick Up the Slack

The December store results indicate that consumers are resisting purchases of everything but the basics. The hit to department stores was even worse. J.C. Penney's (NYSE:JCP - News) sales fell 7.5% in December, and Kohl's (NYSE:KSS - News) reported an 11.4% shortfall compared with last year. "The middle-income consumer is really getting squeezed, which means that they are going to take a nibble out of the high end and a big bite out of the middle," says Patricia Edwards, managing director and portfolio manager at Seattle-based money manager Wentworth Hauser & Violich, with $7.9 billion in assets. "However, that also means a lot of it will flow to the bottom, like Wal-Mart."

Indeed, Wal-Mart Stores (NYSE:WMT - News) offered a rare bright spot in the otherwise gloomy retail picture. Shoppers bought enough basic goods like food and discounted goods to lift the world's largest retailer past Wall Street forecasts, with a 2.4% sales increase. Warehouse club Costco (NasdaqGS:COST - News) also beat expectations, with a 7% sales gain in December. "Wal-Mart's food performance was very strong, which helped drive traffic to other areas of the stores," said Eduardo Castro-Wright, CEO of Wal-Mart's U.S. division, in a pre-recorded conference call. "Our price leadership position was clear very early in the holiday season, and customers responded throughout the period to our pricing and merchandise offerings."

Overall, U.S. holiday sales rose just 2.2% over a year ago, according to the International Council of Shopping Centers, a trade group. "It's the weakest showing since 2002," says the group's chief economist, Michael Niemira. He predicts a meager sales increase for January of 1.5% to 2.0%. Still, it could be worse; in September, 2001, during the last recession, retail sales dropped 2.4%.

The weak performance of luxury retailers reinforces a perception among some experts that the pain is spreading beyond the most vulnerable consumers. Many well-off consumers who are in no danger of losing their home to rising mortgage payments are nonetheless nervous. They've seen the value of stock portfolios drop with the market correction, and they're worried about the values of their homes. "Many people look at homes as part of their net worth, and when their homes are not appreciating in value, they feel less affluent," says Walter Loeb, president of New York retail consulting firm Loeb Associates. "In such an environment, people are shopping to fulfill their needs, not their wants."

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