Will The American Consumer Return?

For years Americans have been spending more than they made. This was often justified by increases in their housing prices and their investments. This argument of course has been shown to be flawed. But in the main, most people didn’t bother to justify their consumption at all. They were keeping up with the Joneses. Everyone else was over-extending themselves so it must be the way to do things.

Since the pall of economic fear has come over the US, Americans have suddenly become savers. The savings rate has leapt from a negative 1% to a positive 4.5%. To finance their new penchant for savings, Americans have become decidedly less consumer oriented. This of course has dire predictions for the profits of many businesses.

The question that most businesses want to ask is: When will the American consumer return? But the better question may be: Will the American consumer return? While the typical consumer’s blind dash to keep up with their neighbors suggests that they might not be wise enough to learn a lesson from this, there is evidence to suggest that we might have seen a permanent change in buying habits.

The first piece of evidence to suggest that shoppers may not return to conspicuous consumption is a simple question of logistics. Banks have tightened their willingness to lend and consequently, even consumers who may wish to return to their leveraged ways will likely not have the option. This in fact may be more of a driving force behind the current instinct to save than is currently realized.

Secondly, households have seen their savings, as represented by house valuations and stock prices, plummet. They will more than likely need time to return to the level of comfort that propelled them into a spending frenzy in the first place. When they were “rich,” from inflated houses and stocks, they felt much more likely to spend, and that state of mind is unlikely to return for some time.

Finally, many consumers have lost faith in the system. They do not feel as fundamentally secure as they did in the heyday of the bubble. Even if they see a return to something that approaches normalcy, they won’t ever feel the same feeling of security that they did before. Their investment advisors, banks and even employers are now viewed with a suspicion that was not there before.

Thus we will likely not know when the recession has hit its low point until we look back in history, but whether the US can return to its status as a nation driven by consumption looks far from certain. There will likely be fundamental shifts in the kind of businesses that are successful as a result of all this fallout and business owners should question whether they are in a position to capitalize on it.