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Will Consumer Spending Really be Different This Time?

Economics / Economic Recovery Nov 18, 2009 - 10:40 PM GMT

By: Hans_Wagner


Best Financial Markets Analysis ArticleMost analysts believe the American consumer has changed their free spending ways. Every article on the state of the consumer indicates they have cut their spending, are saving more, and paying off their enormous debt. Everywhere you go, they expect this pattern will continue as the consumer had fundamentally changed their ways. But have they really?

The New Perspective

Most investing analysts are suggesting the consumer will not be able to lead the economy out of its economic doldrums as this time it is different. The expect people will save more, pay down debt, control their spending and act more frugally. After all, consumers have lost their ability to borrow as before and they have learned their lesson. Thrift is the new mantra.

The CEO of the J.C. Penney Company recently gave an interview to voice his concerns about today's shifting consumer behavior. Myron Ullman recently said that the U.S. consumer has a lot of anxiety and is very concerned about how upcoming changes in healthcare may affect their finances in the immediate future. He continued by saying that consumers are suddenly coming to the realization that "they may need to save more than they had originally planned. Their spending habits have changed to reflect this for the foreseeable future."

Nielsen, the consumer research organization, has suggested that consumers are still demonstrating significant frugality behaviors. They believe consumers are developing new spending habits.

Recently, IBM released a survey on consumer spending that indicates the changes in the habits of shoppers will outlast the economic recession. For instance, 45% of the people involved said “better value” will remain among the most important features when shopping for food as the economy improves, and 36% said “lowest price overall” will stay on top.

One reason these issues will remain problems is that 45% said income is “not at all likely” to rise by 20% by 2014. Only15% of all respondents said they think it is “very likely” their household income will rise by 20% in the next five years.

What people most frequently forgo is shopping for clothes — 38% say they’re purchasing less clothing and 20% said they’re buying less expensive brands. Clothing is also the category most often chosen — by 29% — when asked what they would most likely spend more on as the economy improves.

Essentially, most consumers are spending less and saving more. And who can blame them. The housing crash and meltdown in the stock market erased about thirteen trillion dollars in household wealth. The wealth affect, people’s tendency to spend more when they feel wealthier and less when they feel poorer, could translate into a consumer spending drop of 500 to 700 billion dollars according to some analysts.

They Have Said This Before

Past recessions have raised similar thoughts. Consumers will curtail their free spending ways and spend more responsibly. James Surowiecki mentioned this in a recent New Yorker column. Toward the end of the 1990-91 recession, Fortune magazine forecast the “death of conspicuous consumption” and a Time magazine cover story indicated Americans were returning to a simpler life “after a 10-year bender of gaudy dreams and godless consumerism”. As we now know, these forecasts turned out to be incorrect.

Will it be different this time? I do not think so, at least not to the extent portrayed by the media and many analysts. Part of the American dream is to be able to live a good life. This good life does not mean people will save every possible penny they have and live a life of frugality. Some groups that have captured the imagination of others, saying the best path forward comes from a radical shift in the spending and living habits of Americans. Believing that it will be different this time is unlikely.

Return of the Consumer

Economists have always underestimated the ability of the consumer to recover. There are signs that those that have money are spending again. On November 11, 2009, Toll Brothers, the luxury homebuilder reported orders surged 42 percent in their fiscal fourth quarter, cancellations slowed and revenue beat analysts’ estimates. The company reported that they have been able to increase prices slightly in the last quarter.

Americans, who have an interest in the stock market, are feeling better about their financial situation as they have seen more than 50% recovery in their portfolios from the lows in March 2009. This wealth affect tends to encourage many of these people to spend a little more freely.

The economy still has to work through the excesses from the credit binge of the last housing bubble. Higher savings are signs that consumers are doing their part to correct the problem as debt continues to be paid down. As savings increase, it helps to offset the growing debt of the U.S. government.
While the total unemployment and underemployment rate is at a 17.5 percent rate, we still have 82.5 percent of the people working. Many of these people are comfortable in their jobs. As the economy recovers, they will open up their checkbooks and begin to spend as well.

For those fortunate enough to have a job that has a good future, they are becoming more comfortable with their financial situation. They are likely to spend more, while keeping an eye out for bargains or perceived values. Many of these people cut their spending over the last 12-18 months as the economy fell into a recession. This pent-up demand is starting to return. This is a positive sign for companies that make higher-end electronics, clothing, and accessories.

Unfortunately, a large minority of the population will spend less due to the poor job market. This means consumer spending is divided between those that are worried they will not have a job or their income is on hold and those that are doing just fine.

Retail sales for 2009 will be about the same level as 2005, just four years ago, when consumer spending was doing well. While we have experienced one of the worst recessions in seventy years, Americans are returning to the stores.

As investors, we should look to the upper scale consumer discretionary companies to find opportunities. In addition, the Consumer Discretionary Select Sector SPDR (XLY) will offer additional opportunities.

The Claymore/Robb Report Global Luxury ETF (ROB), a luxury oriented ETF aligns with the upper scale spending. Normally, this ETF would be a good one to own given the current economic situation. The biggest problem with this ETF is the very low volume of trading each day increases risk in several ways. An illiquid stock subjects you to greater risk of buying at a higher price and worse, you might not be able to exit your position at a reasonable stop, should the market turn against you. Any time an ETF is not experiencing sufficient trading, the firm that created the ETF might decide to close the fund. Such an action could cause the price of the ETF to fall more than is reasonable.

The Bottom Line

In the short term, we can expect to see consumers to sustain their frugal spending. Longer term, we should not expect “it will be different this time” as many consumers will return to spending more freely. Looking at history tells us the consumer has contracted their spending for brief periods and then returned to their former ways. While I do not expect the expanded use of debt and using homes as ATMs as in the 2000’s, history will repeat itself and the consumer will return to spend more than many presently anticipate. 

Targeting the consumer discretionary companies that cater to the more affluent and those rising income will benefit from a return to the way it was.

If you wish to learn more on evaluating the market cycles, I suggest you read:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.

Unexpected Returns: Understanding Secular Stock Market Cycles by Ed Easterling.  One of the best, easy-to-read, study of stock market cycles of which I know.

The Disciplined Trader: Developing Winning Attitudes by Mark Douglas.  Controlling ones attitudes and emotions are crucial if you are to be a successful trader.

By Hans Wagner

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at

Copyright © 2009 Hans Wagner

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