The conventional wisdom -- based on past economic cycles -- is that luxury goods sales stay relatively strong in periods of weak consumer spending. After all, people who have a thousand bucks to spend on a purse are thought to be relatively immune to gas prices, the job market, and property values. Sure, their portfolios might take a hit, but they have enough money to buy bags and shoes.

Not so this time around, according to new data (subscription required) from Mastercard's SpendingPulse unit. For the first week of December, sales of luxury goods were down a mind boggling 34.5%.

So what happened? Part of the problem may be the expansion of the luxury goods market to middle-income consumers during good economic times as more people overextended themselves on Louis Vuitton bags they had no business buying. Now that their home values have plunged, their jobs are less stable than ever, and their credit limits have been lowered, they can't buy the stuff. The slick marketing that enticed Middle America into a category that used to be the province of socialites is sending sales sinking on the downside of the economy.

The question for investors in luxury goods companies like Coach (NYSE: COH) is how many of those aspirational consumers will come back once things turn around again.

For anybody who's been following the downfall of Sharper Image, there seems to be a pretty obvious lesson: when people are worrying about the rising cost of food and are scrimping to fill their gas tanks, high-priced doodads and assorted electronic gewgaws are the first things to go. The next things, of course, are luxury goods.

Saks Fifth Avenue (NYSE: SKS)and Neiman-Marcus, two of the bigger high-end retailers, reported massive quarterly profit gains in the end of 2007, but are now acknowledging that their gains have reduced considerably in 2008. Obviously, part of this is the standard post-Christmas drop, but there has also been a significant slowdown in year-to-year growth. In 2008, Saks is anticipating a minor increase over 2007's sales, but a slight decrease in gross margin.

Part of this is due to a reduction in expenditures by "aspirational shoppers," or people who can't really afford super-luxe items, but occasionally buy them anyway. What's particularly interesting, though, is that super-rich customers are also cutting back on their purchases, a trend that some analysts attribute to a contagious feeling of economic worry. In other words, the overall belief that the economy is approaching a recession is reducing spending even among people for whom the economic slowdown isn't a pressing concern. In light of this trend, Saks' stock price has dropped from almost $21 in the beginning of the year to under $13.

In this context, it looks like the next year will be tough for manufacturers and importers of high-end luxury items. After all, if the people who can actually pay top dollar are cutting back, what will happen to the people for whom luxuries are a splurge?

With subprime meltdown and credit crunch in full-swing, there is a lot concern about how consumer spending will be effected. Just yesterday, Fortune's Geoff Colvin declared the American consumer tapped out, saying that the "evidence is powerful that, as incredible as it may seem, U.S. consumers are going to start living within their means again. Brace yourself."

So what does that mean? Well for starters, companies that depend on consumers living above their means probably won't fare too well: This could include many middle-market apparel stores, furniture stores, and other non-essential moderate-luxuries. An old couch looks like a lot more comfy when you can't pay your bills.

But investors seeking solace from the weakened consumer (and remember, you should only seek solace if you think this is likely to be a long-term shift. If you think it's temporary, you may want to buy on the bad news) may want to look toward luxury goods makers.

According to BreakingViews, "If there's a financial crisis going on, nobody told the world's luxury brands. LVMH Moët Hennessy Louis Vuitton, the French luxury group, and Burberry, the United Kingdom apparel designer, say their wares are flying off the shelves. At LVMH, third-quarter revenue grew 15% -- the fastest pace in years -- driven by handbags, watches and jewelry. Appetite for Burberry's tartan creations pushed its first-half retail sales up by 25%, as the group continued its march across the American heartland."

BreakingViews goes on to speculate that continued weakening in the US economy could hurt these brands, but I tend to disagree. Luxury goods consumers are well-positioned enough that they just aren't that vulnerable to the factors hurting lower- and middle-income consumers: rising gas prices, housing woes, etc.

At the opposite extreme, I continue to think that discount stores, especially dollar stores, could do well if the middle-class decides to tighten its belt. But the little luxuries that middle class shoppers like to indulge could find themselves squeezed.

Analysts are expecting Jones Apparel Group Inc (NYSE: JNY) to announce a sale of upscale fashion retail chain Barneys New York any minute now. Sources have indicated Jones CEO Peter Boneparth is looking to sell the chain because of a decline in the company's stock price -- shares closed yesterday at $28.36, while trading in January for over $35. Additionally, having failed to sell the entire company nearly a year ago, Mr. Boneparth may be looking to take advantage of the highly competitive market for luxury goods.

Because of the desire for luxury goods, Barneys has been sought after by publicly-traded companies as well as private-equity groups. There is strong market speculation that Istithmar, the investment arm of the Dubai government, could be the victor in the race for Barneys. Istithmar has a global real estate portfolio valued around $7 billion, including owning apparel retailer Loehmann's Holdings, and has been in hot pursuit of other U.S. properties over the past year. Sources close to the matter believe Istithmar could offer around $825 million for Barneys.

In addition to Istithmar, rumors swirled recently that Neiman Marcus and Nordstrom Inc (NYSE: JWN) had been interested in the chain and considered making bids around in the $800 million to $850 million range price, but dropped out when both companies believed the price would escalate too high, perhaps as far as $1.4 billion.

A sale of Barneys would likely come, as the New York Times reported, as a "partial victory" for Mr. Boneparth. He had been oft criticized that he paid too high a price in 2004 for the chain, but may have the last laugh if the sale price turns out to be nearly twice as high.