Treat people badly and they will spend less money with you ... especially if they fear a return of poor economic times. That, in turn, could slow an overall economic recovery.
A sharp first-quarter decline in customer satisfaction contributed to a slowdown in consumer spending growth, according to the American Customer Satisfaction Index, or ACSI.
The drop comes after record satisfaction levels in the fourth quarter of 2013 helped push spending somewhat higher, despite a lack of discretionary income growth. What's more, the first quarter's slower spending seems to be continuing in the second quarter. Slower-than-expected retail sales in April and May appear to support the weakening inclination to spend that consumers signaled when surveyed by the ACSI in January through March.
"There may be more trouble ahead if the slide in customer satisfaction continues," ACSI Chairman Claes Fornell wrote in the report released earlier in July. "Weaker demand could further threaten economic growth in the second quarter and beyond."
A small drop after a historically strong period is not a reason to panic, but it does underscore just how fragile the economic recovery is. The American people want things to be better, and improvements in the unemployment rate suggest they are. But until the recovery gains long-term traction, people are going to be cautious about spending money.
The recession hit after a stretch of prosperity, and many of those affected learned a hard lesson about being ready for a rainy day. Because of that, early signs of trouble will cause a portion of the American public to dial down their purchases, a decision made easier when companies offer poor service.
The weakening is widespread
The ACSI covers five economic sectors: accommodation and food services, health care and social assistance, information, transportation, and energy utilities. All five showed declines on the index in the first quarter.
Industries that account for nearly $1 trillion in economic activity are down significantly. Here's a snapshot:
- Subscription television service fell 4.4%, from an ACSI score of 68 in 2013 to 65.
- Consumer shipping dropped 3.6%, from 84 to 81.
- Internet service providers fell 3.1%, from 65 to 63.
- Hotels dropped 2.6%, from 77 to 75.
- Hospitals fell 2.6%, from 78 to 76.
- Investor-owned energy utilities sank 2.6%, from 77 to 75.
"Collectively, dissatisfied customers who reduce or postpone spending are always a threat to short-term economic growth," Fornell wrote in the report.
Expenditures on energy and health care are of course less discretionary than things like subscription television services, delivery services, air travel, hotel stays, and dining out. You can put off a fancy meal or a trip, but you can put off paying your electric bill only so long. The same is true in health care.
This could be bad news for some companies
The combination of lower satisfaction and less spending across so many areas suggests that consumers are not only being cautious, they have less tolerance for poor service than when money wasn't as tight. This is most clearly illustrated in the ASCI's 4.4% drop in satisfaction that consumers have with subscription-TV service -- the biggest drop of any category for the period.
With customers now having more options than ever to watch television without paying a traditional cable company like Comcast(NASDAQ:CMCSA), Cox, or Time Warner Cable, (UNKNOWN:TWC.DL) dropping pay-TV makes sense for an increasing number of people. If you're looking to cut costs, that's a logical place to start because there are comparable offerings at a lower price. If you also happen to hate dealing with that company, it makes the decision that much easier.
If overall customer satisfaction is down and people are going to tighten their purse strings, that will likely impact the sectors that routinely perform the worst on the ACSI -- pay-TV, mobile phones, and Internet service providers. Of course, it's not a coincidence that many of the companies mentioned above -- plus AT&T and Verizon -- offer multiple services that people have expressed the most dissatisfaction with.
Given that ACSI has consistently ranked the same sectors -- and many of the same companies -- at the bottom of its index, it seems unlikely that this latest warning will lead to much change.
Lower customer satisfaction leads to less spending, and that hurts the entire economy. These numbers are troubling, but mostly so for the perennial ACSI losers. Those companies may not recover, as evolving markets and an unwillingness to improve customer treatment create conditions that cause people to leave and not come back.