Consumer gives up: Last leg before recovery begins?

The consumer element is the keystone of American Gross Domestic Production and the whims of their buying habits, dictate both factory output and retail input. The government has attempted to artificially trigger consumer spending, with some limited but temporary success. The Cash for Clunkers campaign stimulated auto sales, which stimulated the restocking of retail inventories, thus stimulating the production of new vehicles. Cash programs for the housing market and lowered interest rates did the same for both new and existing homes and lifted the housing industry out of its slump. However government largess is limited and so is the consumer’s interest in compounding debt, no matter how good the “deal” might be.

Current median income has fallen from 1998 averages of $47,259 to 2005 (latest CPI index report) of $46,037. This loss of $1,200 annually, coupled with a national unemployment rate in excess of 9%, has not escaped the American consumer. Professor Martin Feldstein of Harvard reports that America is now experiencing the highest savings rate (6.9%) since 1992. He contrasts this savings to the near 1% rate from 2005 to 2007. The effect of this is that the savings impact reduces purchases and thereby limits production of goods and commodities. Global Hunter Securities released their estimate of 2009 retail holiday sales and essentially projected flat sales, plus or minus 1%. While year on year sales might seem positive, to at least not fall, one must remember that the prior year on year was a monstrous decline of 7.6%. Essentially, the consumer is now saving more, with less disposable income and reducing debt load.

The issue therefore, becomes a chicken – egg controversy, wherein one must decide which one precedes the other. A confident consumer will spend more, but hoards when threats of layoffs, or other economic doom is on the horizon. Factories that make the decision to begin production and increase inventories will employ more people, reduce the unemployment rate and provide evidence of the recession’s demise. The next step must be that the consumer accepts the recession’s end. However, in this recession, the consumer has learned that no one is safe and they are far more reluctant to return to spending excesses than America has experienced for decades.

The only potential for true recession recovery is that the enhanced savings rate has built a cash reserve in excess of $700 billion and much of that is liquid assets that can easily be moved into retail purchases. The average American spends heavily on Christmas purchases and the cash reserve, coupled with moderate debt reduction, should provide the impetus for enhanced retail expenditures. However, this does not translate into proportionately higher profits for retailers. Many retailers are discounting deeply prior to the traditional opening of the buying season, thus seriously reducing margins. The positive for retailers is that, the extended buying season might help ingrain buying patterns that will extend into 2010.

The consumer driven economy must see encouragement, and view it as sustainable, before they return to the marketplace. Industry must now be the impetus, and the government must instill confidence that it has turned the economy around, to foster those signs of encouragement. Retailers must advertise the season to establish an environment that is conducive to establishing a buying mood. One should not anticipate more than a 2 -3% growth in consumer, retail purchases this season but, without hope of better times, there will likely be flat to negative sales. A consumer that remains outside the marketplace will have long lasting, negative effects and it behooves business, to take the risk.