Riding Out the Storm: Implications for Consumer Spending
CHICAGO, February 10, 2009 — "Real GDP contracted at a 3.8% rate in the fourth quarter, significantly less than many expected, but still the worst decline since 1982. Preliminary data on the first quarter isn't any better. Same-store sales continued to plummet in January, as consumers pulled even tighter on their purse strings. On net, real GDP is expected to drop another 5.1% in the first quarter and is expected to drop 0.7% in the second quarter," says Diane Swonk, chief economist of Mesirow Financial, in her February edition of Themes on the Economy.
"'Affordable luxuries, such as the $4.00 cup of coffee, designer handbags, spa appointments, fly-away vacations, hotel stays and dining out get cut, while spending on shoe cobblers, tailors (who can redesign existing suits as well as make repairs to damaged clothing) and vehicle repair goes up. Moreover, the push to get more for what you do spend intensifies, as evidenced by the spending shift from luxury and mid-level retailers to discounters and, more recently, thrift stores," notes Swonk.
In her February newsletter, Swonk takes a closer look at consumer balance sheets, where they are going, and the implications for consumer spending during the remainder of 2009 and into 2010, including:
- Consumer confidence in the economy has plummeted in recent months, hitting a record low in one survey in January.
- Personal income is contracting in response to both job and wage cuts. Wall Street bonuses were down by more than 44%, which, along with layoffs, helps explain at least some of the contraction in retail sales.
- Net worth continues to contract, driven down by both declining real estate and stock prices, which is crimping spending further.
- Considering the losses that pension funds are experiencing and the reality that many retirees will not receive the pension payouts they were once promised, and it is little surprise that the rate of savings surged at the end of 2008.
- Credit conditions remain extremely tight, making it difficult for even the most credit-worthy of borrowers to get loans.
- Layoff announcements and job losses accelerated in January, suggesting that we are still a long way from bottom in the labor market. The unemployment rate is expected to approach 9% or higher, if a stimulus package isn't passed soon in 2009, and remain close to those highs even as growth and profits bounce back in 2010.
- Mitigating factors include: lower energy prices, which has boosted purchasing power; and the Fed's aggressive moves to leverage its balance sheet and shore up credit market conditions last fall, which are far from done-it intends to start buying a broader spectrum of consumer-backed loan portfolios in February (e.g., credit card receivables, auto and student loans).
"There is little escaping a further decline in consumer spending in the first half of the year. This should be obvious given the dismal reports for same-store sales in January, and the sheer number of small retailers going out of business. Prospects for the second half of 2009 are only marginally better. Consumer spending is expected to move back into positive territory, as tax cuts and savings from mortgage refinancing free up cash for consumers to replace things that have broken. Indeed, we aren't likely to see any real improvements in labor market conditions until well into 2011. That is a really long time to wait if you are out of work today," concludes Swonk.
The February issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.
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