Will Consumers Ever Revert to Pre-Recession Spending Levels?

The Great Depression of the 1930s changed consumer behavior for decades among those who experienced the downturn firsthand. Although the vast majority of consumers today have no direct recollection of the Great Depression, most everyone remembers relatives who were frugal into their old age even decades after their economic fortunes improved.

With consumer spending in the United States averaging over two thirds of GDP, figuring out whether consumer behavior will ever return to pre-recession levels is a critical question for economists. The consumer has reliably returned after each of the prior post war recessions, but the current “Great Recession” is much more severe than any downturn since the late 1930s. The longer the recession persists, the more scarred consumers will be over the long run.

Those who follow reports on consumer spending in the United States have seen no shortage of forecasts on this question. It is sometimes interesting to see how our experience compares with that of other countries even though cultural patterns have much to do with consumption vs. savings decisions. ASDA is a British supermarket chain and a subsidiary of Wal-Mart (WMT). In the video shown below, ASDA CEO Andy Bond talks about consumer spending and his views of whether consumer behavior is likely to revert to pre-recession levels.

Disclosure: The author owns shares of Wal-Mart, the parent company of ASDA.

Comments

[Mr. Big:]

For the next decade (or two), consumer spending will be pared back significantly due to the following reasons:

1) Consumers are restructuring their balance sheets by reducing debt and increasing savings
2) Banks have tightened lending standards and will continue to keep it tight going forward
3) Ballooning fiscal imbalance will lead to draconian measures to keep it under control. That means much higher taxes and fees and less money for consumers to spend.
4) U.S. Dollar to decline in value over the next decade, leading to higher consumer prices and higher interest rates and higher borrowing costs. This will pare consumer spending even more.

The end result after two decades is a fundamental shift in economics in the U.S. from being a primarily domestic-spending driven economy more to an export driven economy. Don't rely too much on the consumer to add to growth. If there is growth over the next decade (big IF), it will have to come from the export sector (manufacturing), which will be aided greatly by the decimation of the US dollar.

Aug 05 09:29 AM

[Ravi Nagarajan:]

I generally agree that the consumer is unlikely to return to zero savings rates going forward and other sectors of the economy will have to produce growth. Consumer oriented companies will need to be either very low cost producers like Wal Mart or provide truly specialized products where an economic moat exists. Providers of commodity like products without a low cost structure are doomed in this environment and so are "luxury" retailers that do not have unique offerings but were nevertheless able to survive in past economic conditions.

Buffett and many other value investors always say that macro factors shouldn't drive investment decisions and I agree. However, the aspects of selecting a quality business with an economic moat (a perpetual goal for investors) is just all the more important for consumer oriented companies going forward and something to keep in mind when making investment decisions.

Aug 05 10:02 AM

[hardmanb:]

Economists must realize that there will not be any recovery (to the previous consumer-spending-depe... because it was fueled by credit, unsustainable spending, and unrestrained materialism.

We can't ever go back to the previous economy because it was 71% driven by consumer spending, supported by unwise and ridiculously loose credit card spending, constant refinancing of equity in homes, and bubble-expectations of perpetual rises in home values.

That is over. People know now that home values also drop. Banks, paying off 10%+ credit card defaults, will never to back to the prolific credit card practices of the past. The real estate crash has put an end to no-doc, nothing down, option-pay mortages; teaser-reset rates, and balloon notes for normal folks. People will not be able to maintain the former rate of GDP support of consumer spending, even if they want to. We are going back to good credit records and 20% down to by that house. People will have to take years to save up that down payment.

People (including the children) have personally and vicariously experienced the incredible pain of defaults, foreclosures, homelessness, collapse of investment and retirement accounts, permanent loss of jobs and careers. The lessons are being learned and the lessons will be generational.

Spending less is inevitable. In addition, thrift and savings are rising and will continue. Get used to it, and adjust.

Aug 05 11:51 AM

[seasaw:]

And, the answer is, "YES"!
When? Nobody knows. (however, nominal total consumer spending, not necessarily as a % of GDP, will almost certainly be higher within 10 years - happen to make a significant wager with anyone who disagrees).

Aug 05 01:58 PM

[Blair:]

The savings rate will go back up to the nominal 10% number, based on the 50s - 60s rate.

Yes, it will go back up again, but not to the level see in the past few years. It will happen when the second generation comes with the mindset that their parents, grandparents, etc don't realize there are new times, and the cycle starts over again.

Aug 10 03:18 AM