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Will Consumer Spending Rebound?

Conventional wisdom holds that this recession marks the end of America's fast-paced spending habits. There will be less consumption, less borrowing, more saving and more thrift. A post-consumer economy, as some have called it. James Surowiecki is not convinced.

[Y]ou could argue that consumption has actually fallen less than might have been expected. Spending did drop off the proverbial cliff in the fall of 2008, in the direst phase of the financial crisis, but it stabilized at the beginning of this year, and has now risen for four months in a row. And much of the decrease in consumption since early 2008 can be traced to a drop in spending in just two categories: gasoline (thanks to lower prices) and cars. The decline in new-car purchases has been so steep that the average life of a car on the road today is at a historic high. This is just one example of how better product quality makes it possible for consumers to cut back without experiencing much decline in their standard of living. We can delay buying a new car because the one we have can be driven hundreds of thousands of miles without problems—making the auto industry a victim of its own success. Nonetheless, the response to the Cash for Clunkers program indicates a certain amount of pent-up demand out there.

Of course, none of this precludes the possibility that our frugal ways will endure even after the economy starts to recover. But there are reasons to be skeptical. Recessions regularly give rise to assertions that consumers will begin spending more responsibly. Toward the end of the 1990-91 recession, for instance, Fortune reported forecasts of the “death of conspicuous consumption.” Time ran a cover story on the return to the simple life, arguing that “after a 10-year bender of gaudy dreams and godless consumerism, Americans are starting to trade down.” Consumer-behavior experts predicted that people would be more frugal in the nineties, and consumers themselves said they planned to cut back on spending. It didn’t happen. A decade later, the bursting of the Internet bubble and the impact of 9/11 led many to predict that Americans would consume less—and we all know how that panned out.

This is a far more severe and traumatic recession — the worst downturn since the Great Depression. So, just as the Depression, as the Times put it, “imbued American life with an enduring spirit of thrift,” won’t this recession make Americans thrifty again? Maybe. But the current downturn, bad as it has been, is nothing like the Depression, which lasted a decade and saw unemployment hit twenty-five percent. What’s more, the notion that the Depression turned Americans into tightwads is largely a myth. In fact, it was after the Second World War that America really came into its own as a consumer society. In the five years after the war ended, purchases of household furnishings and appliances climbed two hundred and forty percent, while between 1940 and 1960 the rate of homeownership rose by almost fifty percent. If the Depression didn’t make Americans wary of the pleasures of consumption, it’s unlikely that this downturn will.


By Ezra Klein  |  October 15, 2009; 4:25 PM ET
 
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Comments

There is a difference between "tightwad" and having little disposable income.

The middle class has not had a raise (in real terms) for many years. Energy, health costs, and food have all been rising.
I do not understand where the middle class gets its disposable income in the future

Posted by: gratis11 | October 15, 2009 4:49 PM | Report abuse

My concern isn't so much, how much of a rebound we'll see in Consumer spending. It's a question of how much of an increase in consumer debt will accompany it. I know spending spurs the economy but people routinely paying 21% APR on their purchases is not much of a basis for steady growth.....

Posted by: PhD9 | October 15, 2009 5:06 PM | Report abuse

I read this article and it was interesting and all, but you really only have to read the first paragraph. If there really are stories about how “cheapness is a new status symbol,” then obviously the consumer culture hasn’t gone anywhere.

(also posted this exact thought at http://blog.thepixelkitchen.net/2009/10/15/thought-of-the-day-3/)

Posted by: ajw_93 | October 15, 2009 5:27 PM | Report abuse

consumption can rise again if real wages rise. or if people take on debt. or if they cash in on a new bubble. after world war ii from what i understand real wages did rise. the period after 1970 witnessed and expansion of credit, while the past 10 years have seen two bubbles which allowed people to cash out. where do we go now?

Posted by: razibk | October 15, 2009 6:35 PM | Report abuse

regardless of what happens to real wages, what will not return is spending 101% of income (i.e., a negative savings rate).

now, where the savings rate will normalize out i can't say, but i can say that people are virtually certain to have one of some amount for quite some time to come.

Posted by: howard16 | October 15, 2009 9:13 PM | Report abuse

Simply looking at the structural factors of the economy, combined with the negative savings rate, led people like Roubini to predict a massive cutback in consumption and a couple years of negative GDP growth. Thankfully that's not happening, it seems people's consumption patterns don't change on a dime like that, and besides a lot of consumption is not really a choice (like health care and education).

Simply losing a job for a few months, then getting a new one in a tough environment, I bet, is not going to change your spending habits dramtaically. But going through extended joblessness or underemployment over a period of years, where the nationwide unemployment rate hangs around 8-10% for years? That could be enough to change people. Kids are going to grow up and enter the workforce in this environment. My guess is we haven't seen the final, lasting impact on consumption patterns.

Of course, wherever there is a strong economy over the long term and a decent safety net, you're probably not going to see very high savings rates like you see in some parts of Asia, for example. This is not a bad thing. It shows people feel safe enough to buy their kids a pair of shoes or a decent backpack rather than socking the cash away for the next catastrophe.

Posted by: jjohn2 | October 16, 2009 6:34 AM | Report abuse

Stephen Marglin (Harvard's lone radical economist, at least in the economics department) had an interesting article back in the day, "What Do Bosses Do? Part II" (at http://www.economics.harvard.edu/faculty/marglin/files/Bosses_Part_II.pdf) (Part I is good as well, but is more historical and less relevant to the question at hand. For the curious: http://www.economics.harvard.edu/faculty/marglin/files/What_Do_Bosses_Do.pdf)

In the article, he offers a theory of consumption to challenge those offered by Modigliani's "life cycle" hypothesis and Friedman's "permanent income" hypothesis. In short, except for those at the top of the capitalist hierarchy who have more income than they are capable of spending, the majority tend to consume all of their income--with the caveat that spending habits change somewhat slowly, so that consumption changes lag a bit behind income changes. Following WW2 and up til, say, the 80s, incomes were trending up, and that meant that consumption also trended up, but with a lag. The gap between the trends was the source for capital accumulation that powered investment in ever-more income-generating business and industry.

I'd love for Marglin to update the theory (the article is from the 70s) and either explain how it still holds, or modify it to account for a situation of stagnant incomes. There was obviously some degree of consumption overshoot in the past bunch of years, resulting in all that debt. If incomes continue to stagnate into the future, what then?

Posted by: JonathanTE | October 16, 2009 10:20 AM | Report abuse

I doubt it will change, either. If you really wanted a return to "frugal ways", then you would need a change in the systemic factors that promote consumption, like very low interest rates (which promote borrowing and retard saving), and tighter regulations and requirements on both loans and credit cards. Both would constrict consumer spending and drive up the savings rate, but do you see either happening? I don't.

Posted by: guardsmanbass | October 16, 2009 10:31 AM | Report abuse

UC Berkeley economist Martha Olney points out that the federal government can help jumpstart consumer spending. "What the federal government needs to do is direct money to the state and local governments. Stop the budget cuts at the state level. Stop the bleeding at the local level. Get the teachers back to work. Get the staff back to work. Who knows? They may even go out and buy a washer with that first paycheck! Her complete post on The Berkeley Blog is a http://blogs.berkeley.edu/2009/10/09/spend-spend-spend-who-me/

Posted by: TheBerkeleyBlog | October 16, 2009 1:31 PM | Report abuse

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