Spending is Distorted in Hard Times
The Consumer Affordability Index (CAI), which tracks how consumers feel about the affordability of the products they usually buy, signaled the start of the recession in November with a seven point drop from 100 in October to 93 in November and ticked down to 92 in December.
In response to the pinch of recession, consumers cut holiday spending. The percent of consumers who reported having reduced the amount they spent during the Holidays jumps year to year from 43% in 2006 to 50% in 2007.
In January, CAI rebounded to 96. The four-point rise from 92 in December to 96 in January had created a cash cushion which allowed consumers to ease restraints on spending.
In February, with Holiday savings spent, the CAI slipped to 94 and then ticked down to 93 in March. If anything, grip of recession has tightened.
METHODOLOGICAL NOTE:
The Consumer Affordability Index (CAI) is computed monthly from data obtained in telephone surveys of fresh samples of 450 consumers selected by random digit dialing from the nation at large.
Surveyed respondents report whether the balance between their income and their savings versus their debt plus spending is improving or deteriorating.
The CAI is inherently stable since consumers constantly increase and decrease spending to an affordable level. Illustrating the stability of the CAI, over the past twenty five months the CAI ranged only 17 points from a high of 109 in February 2007 to the low of 92 in December 2007. When the CAI reads below 97 for several successive months the nation is in recession.
A surge in gasoline and food prices in March made it even harder for consumers to get along and pay their bills. The Index tracking consumer willingness to spend freely for food, gasoline and consumable products declined four points from its already low level of 82 in February to 80 in March.
Simultaneously, we see cutting back on shopping actively for cars, houses, appliances, and the nine other categories of major goods tracked in our survey. The index tracking active shopping for major goods declined abruptly from the fairly high level of 116 in February to 111 in March.
As consumers struggled to get by in hard times and the financial markets in turmoil, Wall Street and the government panicked. Fed Chairman Bernanke announced he was ready to do whatever needed doing to stave off recession, cut interest rates and pump cash into the financial system to make credit more available.
Congress authorized emergency legislation, which included sending money directly to consumers in the form of “tax rebates.”
Despite these efforts, hard times persist and continue to be of indefinite duration.
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