A Brutal Truth Facing Consumers

A recent survey by Consumer Reports National Research Center shows just how retrenched consumers have become: In it, 71% of respondents said they purchased "only what they absolutely needed."

For an economy 70% fueled by consumer spending, that's no small statement. At first glance, it might be encouraging for companies like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , since it implies consumer spending has hit a floor.

Or maybe not
Then again, Americans have been known to be wildly off base when it comes to rational spending. Personal savings data, for example, shows plenty might be fooling themselves with the definition of what's "absolutely needed."

Two components eat up consumers' income: spending, and saving. We're talking about "disposable" income here, so the other big component, taxes, is already out of the equation.

So if consumers insist they can't spend any less, that means they can't save any more, all else (like income levels) being equal.

Baby steps
Since the recession began two years ago, consumer spending has plunged and saving has surged. That's why we're in deep water to being with: After spending and leveraging into oblivion, everyone from average citizens to Goldman Sachs (NYSE: GS  ) to Ford (NYSE: F  ) is trying to delever and refill their tanks at the same time.

After bottoming out below 0% in 2005, personal savings jumped above 6% in May. This is a seismic shift: a 6% savings rate annualizes out to $681 billion. That's $681 billion that was recently being spent and is now suddenly being dumped into savings accounts. While that's created a nightmare for discretionary-based companies like Best Buy (NYSE: BBY  ) and Home Depot (NYSE: HD  ) , it's the only good thing that's happened to personal balance sheets in years.  

Problem is, as ferocious as the surge in savings has been, the rate is still low by historic standards. Looking at post-World-War-II savings rates shows a pretty stable trend up until fairly recently:  

Period

Average Personal Savings Rate

1952-1962

8.04%

1963-1974

9.06%

1975-1986

9.62%

1987-1998

5.88%

1999-2009

1.72%

Now compare that to the monthly savings rates logged so far this year:

Month (2009)

Personal Savings Rate

January

4.4%

February

4.2%

March

4.5%

April

5.7%

May

6.2%

June

4.6%

July

4.0%

August

3.0%

Source: Bureau of Economic Analysis.

The savings rate that 71% of the survey's respondents indirectly claim is as high as can be is still roughly half -- maybe as low as one-third -- the rate we saved at in the three decades after World War II. If you believe in reversion to the mean, that's a scary thing.        

That’s not just because it means many who think they can't spend less are probably fooling themselves, but because so many of those same people are also up to their eyeballs in debt.

As I showed in a previous article, the household debt/disposable income level is in a league of its own compared to previous years:

Year

Household Debt/Disposable Income

2008

130.0%

2003

116.4%

1998

92.6%

1993

86.0%

1988

81.2%

1983

66.4%

1978

68.7%

1974

63.5%

All this means is that deleveraging provides a catalyst forcing consumers to save substantially more than they did in previous years … years when they saved as much as three times more than they do today.

Beleaguered spender, meet reality
This is old news. Why I bring it up today is simply to respond to the survey's findings: If 71% of us truly believe we're spending only what we absolutely need, we're in trouble. As hedge fund manager Kyle Bass recently put it, "We are left wondering how broad based unemployment [unemployed + underemployed] went from its most recent trough of 7.9% in December 2006 to 17.0% currently, while total retail sales declined only 3.6% over the same time period."

In other words, there's still a disconnect between consumer spending behavior and economic reality. Bridging that disconnect will mean that plenty of those who currently think they're living on a bare-bones budget might need to face a new reality.

Too many people, it appears, haven't come to terms with the brutal truth that the "new normal" economy also means a new normal standard of living.

What do you think? Fire away in the comment section below.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Best Buy is a Motley Fool Stock Advisor recommendation. Best Buy, The Home Depot, and Wal-Mart Stores are Motley Fool Inside Value recommendations. The Fool owns shares of Best Buy and has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2009, at 5:35 PM, Cofitz wrote:

    It's interesting to see the term "standard of living" rather than the term "lifestyle". Adopting (or trying to adopt) a lifestyle is what got a lot of us into trouble financially.

  • Report this Comment On October 07, 2009, at 7:03 PM, DDHv wrote:

    My parents came through the 30's. They carefully taught us kids the difference between "want" and "need." My wife's parents were also like that. At present we are living off my wife's social security, reinvesting income from earlier investments, and investing about half of my SS. We could cut down more if we wanted to, but then couldn't do everything we want to do.

    There is still plenty of margin. I saw on the net an article by a couple who tried to see just how much they could put away. They managed about 50%, but didn't think they could keep it up for another month! :-)

  • Report this Comment On October 07, 2009, at 7:13 PM, StockMaster30 wrote:

    Is amazing how fast we forget as soon as stocks rebound everybody starts fealing comfortable and 1 or 2 years later we are in track to the se situation since considering that there are a bunch of kids and teenagers who by nature tend to forget unpleasant periods and them are the ones to come and fuel the next boom and doom.

  • Report this Comment On October 08, 2009, at 12:00 AM, thisislabor wrote:

    I am 24yo and this makes emotional sense to me.

    My litmus test is my gym work out.

    I have found that when I first started going around about a year ago today I was//and did have much more of an "enthusiasm" or a sense of "I have to" about going, and "work"ing out. It was a "work" out for me...

    Now that I have dropped 12lbs, and probably gained as many in muscle I don't have quite the same determination to stick to it.

    Essentially, I need to get back to "working" hard at working out. Or paying off student loan debts early etc.

    same conclusion I have been coming to in other areas of my life not just finances.

  • Report this Comment On October 08, 2009, at 12:05 AM, thisislabor wrote:

    I wouldn't say that I forget the unpleasant period...

    but I would say I am not as dissatisfied any more. I am so use to being completely screwed up, that being only slightly screwed up doesn't seem that bad.

    My frame of reference is off scale so far to the left that I can't see it from the right. So, I am becoming copecetic with the progress and not seeing it as a problem anymore.

  • Report this Comment On October 08, 2009, at 12:51 AM, YEN4PESOS wrote:

    Interesting take,.. It's often been said that Americans don't react to an oncoming crisis no matter how many warnig signs, omens, and portents we receive until that crisis just smacks us in the face. Our naivete is only surpassed by our egos a brutal but true statement I'm sure many of us has heard. Well, welcome to the mats, because, we sure got smacked. Now,... we do what we are also known for and that is a come back with veracity. And make no mistake, we will. Yes, there are some still that will spend foolishly, that will never change,... ask PT Barnum. But America, and I mean the sensible America, as your data quotes has realized that it has been getting ripped off for some time and we're tired of it. The dropping creditcard debt is one piece of data that supports this. And, as more and more crds are paid off and cut into little pieces Banks and Retailers will find out more and more that we are through playing their silly games.... Deflation will be more and more a threat as opposed to inflation. America is just not going to buy untill the prices are down more. For example,... Cash for clunkers and its horrendous conclusion proved two things. The car Industry CAN sell cars. But we won't buy unless the price is right... What this little foray into the auto market tells me is that you can sell a whole bunch of cars when they are priced right. And that number turned out to be about 4500.00 off the current sticker... Hey Michigan !!! You wanna sell cars to the new American consumer???... Drop the price, You'll sell all you can make.... Thats the bottom line.... How you get to that acceptable price is yalls problem... But I wouldn't count on the Tax Payers money any more... That would be to obvious a rip off.

    No my foolish friends,... The middle man is finally having to come off the outrageous profits he ripped us off with.. You will see deals in the very near future that will make your head spin... Big screens for a fourth the price they were this summer. clothing, toys, computers, electronics of all kinds.... all kinds of non durables at semmingly giveaway prices... But guess what friends..... They are still making a profit. You can bet on it.... No the problem is not that we don't have the money (speaking from the macro view) in fact according to nearly all sources out there we have more money and we are just not letting go of it.... Well good for you America ! It; about time the consumer had the hammer a while. I promise you this ...(a simple rule of commerce)... The middle man and the retailer WILL COME DOWN to met what the buyer is only willing to pay.... Ask your big shot boys in Michigan...... So kepp on being frugal Yall... They'll figure it out soon enough (when they get tired of eating inventory sandwiches)... And do yyour selves a favor... Slap your kid for even thinking about wanting to put some stupid item on a credit card this Christmas... and above all BE A GRENCHHHHHH.....

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1001920, ~/Articles/ArticleHandler.aspx, 11/23/2014 1:25:37 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement