One of the defining trends of the retail industry in the past decade has been a great hollowing out of the middle. Mid-tier chains have struggled or disappeared entirely. Discounters--exemplified by Wal-Mart--have thrived at one end of the spectrum and luxury chains have seen exploding sales and growth at the other end.

The current economic malaise and wavering consumer confidence have given rise to new uncertainty. Many pundits and retailers are predicting a soft holiday shopping season. And Wal-Mart--which seemed indomitable 12 months ago--has shockingly stumbled. Sales growth has waned. The retailer suffered its first money-losing quarter in more than a decade and it's even scaling back its aggressive expansion plans.

So how do things look on the upper end?

The answer gets a bit complicated. To date in 2007, luxury chains have remained retail stars. Luxury department store chains have averaged same-store sales gains of 8.6 percent per month this year--higher than either 2005 or 2006. With the exception of June--when sales grew just 1.8 percent--the sector has soared. Such stores posted double-digit percentage increases in each of the first three months of the year. Even in April, when, as a whole, retail same-store sales dropped 1.9 percent, luxury department store chains posted gains of 4.3 percent. In August, luxury sales posted same-store gains of 8.2 percent.

Still, there are concerns. The ICSC figures only include luxury department store chains like Saks Fifth Avenue and Nieman Marcus and do not include smaller specialty chains like Coach or Tiffany & Co. There, sales saw more of a dip, according to Milton Pedraza, CEO of New York-based Luxury Institute, which monitors luxury spending trends.

"With all the uncertainty, all the bad news we got in July and August, there was an abrupt slowdown in the luxury sector in September," he says. Moreover, in a possibly telling sign that luxury chains are expecting a slow holiday shopping season, retailers put a hold on orders from fashion houses including Hugo Boss, Gucci and Versace, according to a report in the New York Post.

A big reason for the slowdown may be the troubled middle-class, not the rich. Middle-class consumers, whose incomes range from approximately $30,000 to $80,000 a year, accounted for as much as 70 percent of luxury purchases at some chains, according to Michael J. Silverstein, a Chicago-based senior partner with the Boston Consulting Group, an international strategy and consulting firm.

Currently, analysts divide luxury into two categories--true luxury, represented by chains like Hermes, which cater exclusively to the uber-wealthy, and more affordable brands like Coach, which target both wealthy and middle-income consumers. Retailers who cater exclusively to the superrich will continue to see strong growth, while stores that aspire to the label of luxury will suffer, notes Jay McIntosh, director of retail and consumer products with Ernst & Young. Going forward, analysts express confidence that the luxury sector will continue to enjoy healthy gains, though they have revised their annual growth projections from 8 percent to a low of 5 percent.

Experts expect mid-market consumers facing mounting pressures--such as soaring personal debt, the housing crunch and rising gas and food prices--to buy fewer luxury items this year than in the past. A survey conducted by Charleston, S.C.-based marketing firm America's Research Group in August, reported that 17 percent of consumers said they felt mounting pressure from higher bills and credit card debt, compared to 10 percent who felt that way in 2006.

Still, while middle income customers may cut back on luxury purchases, the ranks of the wealthy have increased. In 2006, 8 million U.S. households had annual incomes of $150,000--a 7 percent jump over 2002, according to the Luxury Institute. The number of "ultra high net worth" households--defined as having net worth of $5 million or more, jumped to 1.14 million in 2006--more than four times as many as a decade ago, according to consulting firm Spectrem Group. The number of households with net worth of at least a $1 million was up to 9 million in 2006, up 8 percent from 2005.

Another factor that could impact performance is foreign tourism, especially with the heavy devaluing of the dollar. The dollar hit an all-time low on October 1, trading at 77.657 based on a basket of six foreign currencies. That could prove to be a mixed blessing, as tourists continue to flood the U.S. in search of bargains. In the second quarter of 2007, 11.6 million international visitors traveled to the United States, nearly an 8 percent increase from the same period last year, according to the U.S. Department of Commerce. By year-end, that number is projected to reach 54 million. Last year, 49 million foreign visitors spent a record $104.8 billion in the United States.

With foreign spending combined with the ultra-wealthy U.S. consumers, the luxury sector should continue to grow at least 6 percent annually, according to Dana Telsey, CEO and chief research officer of Telsey Advisory Group, a New York-based equity research and consulting firm. "We spoke with buyers at almost every luxury department store out there and there continues to be strong demand," she says. "We think that a lot of the talk out there is more hype than reality."

--Elaine Misonzhnik