Consumer spending has been the driver of the US economy for well over 25 years, now accounting for more than 70% of our gross domestic product. Among other side effects of the mortgage and housing woes and high energy prices is a growing chorus that the consumer may have finally hit his spending limit, which could spell more trouble for the economy.
There is no question the growth in both disposable personal income (income less current taxes) and spending has slowed. After increasing 3.1% in 2006 and 3.1% in 2007, disposable income grew at only a 1.5% annual rate through April 2008. Likewise, spending grew at 3.1% in 2006 and 3.0% in 2007, slowing to 1.0% through April 2008. (Figures for both May and June 2008 were influenced by the economic stimulus payments, although a larger share of those payments than hoped went to debt payment rather than spending.) Here are a just a few ways the consumer is reacting to his pain.
Transportation – With gasoline prices “soaring”, this is certainly the most visible area of change. Sales of large vehicles have fallen off a cliff, with both Ford and Toyota announcing plans to convert plants to produce smaller or hybrid vehicles. All three domestic automakers, faced with losses from plummeting residual values for leased vehicles, are cutting back or eliminating their lease programs. It appears that $4 gasoline is the “tipping point” at which a slow gradual change becomes irreversible and then proceeds with gathering pace.
In May 2008, the number of highway miles traveled dropped by 3.7%, a whopping 9.6 billion miles. For the first five months of 2008, the decrease was nearly 30 billion miles, 2.4% less than in 2007. Trips on public transportation increased 3.3% in the first quarter, an additional 85 million trips, according to the American Public Transportation Association, even though only 54% of Americans have reasonable access to some form of public transportation. Sales of scooters, which can go up to 90 miles on a gallon of gas, are up 65% in 2008, and fuel-efficient and hybrid cars are flying off dealer lots. Even in Texas, electric neighborhood vehicles are catching on. Ironically, prices of large SUV’s have fallen so far that even at the $5 gas level they may now be the more economical choice to own and operate.
Food – Higher prices have hit casual-dining and discretionary establishments hard, with several chains declaring bankruptcy and even Starbucks announcing store closures and layoffs. On the other hand, bulk retailers and less-expensive store brands are seeing sales increases as consumers stretch their dollars. Aside from cost savings, dining at home is likely more nutritious than eating out because of controlled portions and less temptation to splurge. Family meals are also generally thought to offer social benefits, the most recent being a study which concluded family meals reduced teenage girls’ risk of using alcohol or drugs.
Housing – Housing prices have declined nearly 10% nationally and much more in local markets, to the point where some observers are now trying to determine and take advantage of the bottom of the market. Still, houses continue to sell, with growing interest in clusters of smaller cottage homes that are located near jobs and shopping. There are also long-term housing implications, with more cities now implementing or considering long-range development plans intended to promote city living, focus development and combat the random sprawl that has led to energy-inefficient lifestyles.
Consumers are making efforts to “declutter” their homes, too. According to Craigslist, the online classified website, garage sale listings are up 95% over last year. Because of increased supply and a preference for contemporary styles, prices of quality antiques are less than half of previous levels. There are plenty of opportunities for the savvy buyer as a result.
Fashion – Despite the weakening dollar that has increased the cost of imported clothing, clothing sales have been flat in 2008 compared to the prior year. Consumers may drift toward classic, timeless styles to avoid fashion obsolescence, especially for professional dress. And here’s a simple suggestion for stretching the fashion dollar – develop a personal style and simply stick with it over time. By sheer coincidence of shifting tastes you will be at the leading edge of fashion at least three times, which is more than can be said for constantly spending money chasing fashion trends.
Travel – The days of international and luxury travel for the masses may be over. Airlines in particular are raising fares, reducing flights and cutting services, not to mention the reviled fees for checking luggage. Overall airline capacity is expected to be reduced by as much as 10% through 2008. The number of non-stop destinations from Tucson International Airport has gone from 29 to 17, a drop of 41%.
The additional costs and hassles of travel have created a new experience – the “staycation”, a vacation that is spent at or near one’s home. Enthusiastic staycationers get all the benefits of a vacation (defined by Webster as “a period of suspension of work, study or other activity, usually used for rest or recreation”) by immersing themselves in local culture and attractions and by actively separating themselves from their routine as if they were traveling. Some entrepreneurs have begun to support the trend by decorating homes and apartments as hotel rooms and providing the types of services typically found on the road, all while staying at home.
That debt-laden, devil-may-care consumer we got to know so well may be dead, but the new consumer is alive and well. In true capitalist fashion, he is adapting to new economic realities and changing his behaviors, but he has decidedly not stopped spending. It is a positive development and will still present opportunities for growth and profit.