Consumer Spending during a Recession

At the core of any upswing or downturn in the economy is consumer spending. Consumer spending feeds every aspect of the economy, including agriculture, transportation, manufacturing, retailing, and finance. During good economic times consumers have enough money, or are willing to use debt, to buy the goods and services they desire on a fairly consistent basis. During bad times, or as in the current recession, consumers are faced with declining income, high unemployment, inflation, and uncertainty about the future. Combined, these factors result in the loss of consumer economic purchasing power, which is the primary reason for consumers to change their spending habits.

Consumer spending, at least in the United States, is nearly entirely allocated to purchasing consumer goods and disposable products, with very little or no savings. The Gross National Product, a measure of the value of the total goods and services produced in the economy is largely driven by consumer spending, so any shift in spending habits on a large scale, affects the entire economy. During today’s stressful economic times, now being called by some experts “The Great Recession”, consumers in many formerly thriving cities and industries, are being forced to adopt a financial survival strategy as a means to cope with the symptoms of recession: lower income, declining, or in some instances, vanishing benefits, rising costs, low investment income, and much more. The list of negative economic factors goes on and on, affecting nearly everyone, including the nation’s wealthiest and most powerful elite. When the rich and powerful have to adjust their spending habits, it’s a pretty safe bet that the national economy is in real trouble.

So, how are consumers changing their spending habits in order to cope with all these negative factors? Since money, or the lack thereof, is the medium of exchange for labor, goods and services, families are, taking a serious look at the basics of sound money management principles. A comparison can be made between business financial management practices and household financial management by comparing some financial management terms. Concepts such as managing expenses to stay within the limits of household income (budgeting), making safe, or lower-risk investments (conservative investment portfolio), minimizing long-term (mortgage) and short-term (credit card) debt, careful budgeting to meet cash flow (future) demands, cash reserves (savings), and fiscal responsibility and accountability. In this instance, fiscal responsibility refers to taking responsibility for the health and well-being of the family. These are serious-sounding concepts, but they are the foundation of sound financial management principles, and apply equally well at home as in the office.

If you remove the business jargon from the discussion, consumers are seeking to 1) live within their means, 2) increase their savings, 3) make careful investment and purchase decisions, 4) plan for a dismal (or so it seems) future, 5) find the best value for their hard-earned and now precious dollar, and 6) look for opportunities to improve their financial situation through training, education,and alternative employment. For most families, giving up on the economy, and their families future, is simply not an option. The way some consumers are planning to survive is change today’s spending habits from the excessive spending of the past into practical spending habits that will help shape the new economy waiting to appear at the end of the recession.