As Recession Deepens, Consumers Change Where They Shop and What They Buy to Save Money
The percent of consumers checking prices and visiting dealers as they shop actively to buy autos, housing and ten other major products drops abruptly from an INDEX of 93 in September to 81 in October – the lower limit of its range over the past year.
Simultaneously, the already meager percent of consumers willing to spend freely on food, clothing, gasoline, and medical services drops from its already low INDEX of 74 in September to 71 in October – again the lower limit of its past-year range.
The greater reluctance of consumers to lay out cash extends to the purchase of common stock. The ratio of willing buyers to anxious sellers in the event of a 10% decline in the Dow Jones Index drops from 1.68 buyers to each seller in September to 1.08 buyers for each seller in October.
This overall shift toward extreme thrift reflects the sharply negative change that took place between September and October in the balance between consumer income plus savings vs. debt plus spending.
Our most direct and sensitive indicator of how consumers evaluate the balance between their savings plus income vs. their debt plus spending is the Consumer Balance Index (CBI). Between September and October, the CBI dropped from 83 to 73 – the lowest level in the past year.
Conceptually, in computing the CBI we treat Americans as a nation of bookkeepers who note transactions and seek to keep their books in balance. When consumers’ financial balances shift negatively, they reduce their spending to an affordable level. Similarly, when their financial balance shifts positively, consumers react by increasing spending.
Operationally, information for calculating the CBI comes from telephone interviews conducted each month with a fresh national sample of 480 consumers, who report whether the balance between their income plus savings vs. their debt plus spending obligations is increasing, decreasing or remaining stable.
The September to October decline in the CBI reflects an abrupt reduction in the percent of consumers who feel their financial balance is “great” from 19% in September to 13% in October, making a new low. In the previous year, the percent reporting “great” financial balances ranged as high as 25%.
The population segment with “great” financial balances includes a disproportionate number of consumers in the upper economic class. In October, 17% of people with a “great” financial balance are in the upper economic class, compared to 11% whose financial balance is “good or marginal” and 6% whose financial balance is “poor or awful.”
Conversely, only 6% of consumers with a “great” financial balance are in the lower economic class, compared to 13% in the “good/marginal” class and 16% in the “bad/awful” class.
Consumers with “great” financial balances account for a disproportionately large proportion of all financial transactions, including: trading of common stocks and mutual funds; purchases of cars, housing and other major goods; and dollars spent on consumables – i.e., food, clothing, gasoline and medical expenses.
INVESTMENTS
The percent of consumers owning common stocks and mutual funds who say they will buy rather than sell common stock in the event of a 10% decline in the Dow Jones ranges from a ratio of 3.15 buyers for each seller among consumers with a “great” financial balance, down to 1.93 buyers to each seller among consumer with “good or marginal” financial balance, to a low of 0.34 buyers to sellers among those with a “poor or awful” economic status.
ACTIVE SHOPPING FOR MAJOR GOODS
The index measuring active shopping – checking prices, visiting dealers – for cars, housing and ten other major products is sharply higher among consumers whose financial balances are “great” (151 INDEX) than among those with “good or marginal” balances (87 INDEX), and it is lowest among those with “poor or average” financial balances (52 INDEX).
The Index measuring active shopping for major goods understates the extent of spending reductions for major goods, in that it reflects the percent of population actively shopping but does not also reflect their propensity to reduce spending when pinched for cash by trading down – that is, by:
- foregoing shopping higher-priced stores in favor of shopping at discount retailers, and
- foregoing buying high-priced brands and models in favor of buying lower-priced brands and models.
DAY-TO-DAY SPENDING
The Index measuring spending for food, clothing, gasoline and medical services is also tightly related to the financial balances of the consumer.
Among consumers with “great” financial balances, the Index for spending on consumables is 106. The Index drops to 78 among those with “marginal or poor” financial balances and declines even farther to 46 for those with “bad or awful” financial balances.
Again, this index tends to understate the extent to which consumers, feeling pinched, seek to curtail spending by “trade down.” To reduce the number of dollars spent for:
- food, consumers shift from buying food with high water content (fresh meat, produce), to foods with low water content (rice and beans). They also live lower on the “chain of life,” forgoing beef for pork or chicken, which are more efficient at converting grain to meat. There is even talk of and experiments in utilizing algae as a source of food.
- medical care, consumers defer annual check-ups and elective survey (including cosmetic surgery) and increase pressure on the government to provide medical insurance.
- clothing and cosmetics, consumers stick with the basics and are attracted to purchasing designer ware on the cheap.
- gasoline, consumers save by driving less and, instead, using public transportation, walking, bicycling and avoiding the purchase of high-mileage cars.
LOOKING AHEAD
The September to October reduction in the percent of the population with “great” financial situations is a portent that the troubles plaguing financial markets are about to slow the overall economy.
As consumers see the value of their assets sink and become concerned about the security of their future income, fewer are willing to spend freely, and more seek to avoid spending by avoiding purchases of higher-priced, more profitable products.
While politicians may debate whether prosperity for upper income consumers trickles down to the benefit of lower income consumers, there is no debate about the speed at which misery experienced by upper income consumers slows the economy and induces misery for lower income consumers.
The candidates for the Presidency, in promising the public they will do great things for the economy, are currently buoying consumer spirits.
The next report on the CBI is scheduled to be issued on about November 20 – about ten days or two weeks after the Presidential election will be decided.
Copyright October 2008 by Leo J. Shapiro – All Rights Reserved.