Falling Consumer Horsepower and Economic Growth

May.15.09 | About: Briggs & (BGG)

Tim Duy has a grimmish post today — he’s south of the inflection point with me, but a bit farther west of the bottom — that included some particularly interesting bits on the changing nature of consumption patterns:

Funny how the market for $10,000 ovens disappears with the housing boom. Surprise - people are thinking that maybe this is too much to pay for a device primarily used to boil water. The simple fact is that the consumer is downshifting, with very real and long lasting implications for business behavior. One of the best examples of this came from Briggs and Stratton:

Briggs & Stratton Corp., which supplies engines for mowers, tillers and tractors, recently noted consumers are shifting away from riding equipment to lower-horsepower equipment, a trend that holds implications not only for equipment makers but also the retailers, said Raymond James analyst Budd Bugatch. Higher horsepower riding equipment has a higher average selling price and margin “for everyone in the channel,” he said.

Note the “everyone in the channel” quote. Consumer downgrading crushes profit margins across the board. And this is a problem that will not be easily fixed; as I argued earlier this week, households are likely to remain credit constrained despite the heroic efforts from the Fed.

There’s obviously a story here about constrained consumer budgets, but I’m more interested in what this says about the nature of economic growth. It’s interesting to me that growth in the boom was driven, in part, by so much conspicuous consumption — too fancy ovens and higher horsepower mowers — just as it’s interesting to me that it wasn’t driven, in the numbers at least, by things like Wikipedia. On the one hand, people were buying a lot of stuff that was expensive, just because it was expensive. On the other hand, the web is full of extremely valuable stuff that doesn’t cost a thing, and which has largely been created by volunteers.

If we redistribute resources from the former to the latter, are we richer?