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:  

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

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:

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.

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