When the Going Gets Tough, We Splurge on Little Things
It's easy to think of the economy as one massive entity that either grows or shrinks as a single unit. In reality, things are much more complicated. Many products do sell like crazy when the economy is booming and move slower than molasses in January when times are tight. Still, there are some products that can do better when the economy is soft.
A classic example is the automobile industry. The industry is very cyclical, and during boom times, new cars can practically fly out of dealers' inventories, while during recessions, a new car is a purchase that can be put off. On the flip side, as people keep their cars longer during bad economic times, those cars generally need more maintenance and repairs as they age. That means that companies that sell car parts, like Genuine Parts (GPC), for instance, could do better when times are tough.
Splurging With Everyday Luxuries
As consumers put off buying big-ticket items, they often turn to smaller discretionary purchases instead. During the recent Great Recession, simple luxuries like chocolate, craft beer and even video games did well even as bigger-ticket luxury items like travel suffered. Even today, as we emerge from that economic malaise, spending on affordable luxuries like personal care items was up far faster in July than overall spending.
According to data from the National Retail Federation, consumers generally cut back on discretionary spending this July. Despite that general pullback, spending at health and personal care stores increased. Sales were up in those channels by 0.4 percent vs. June and 7.2 percent vs. last July. Compared to the negative 0.1 percent change vs. June for purchases at electronics stores, the spending at health and personal care stores was substantially stronger.
In reality, electronics, similar to cars, are often large-dollar purchases that can be easily postponed. When the going gets tough, they're often good candidates for people cutting back their spending. On the flip side, personal care goods like and services like massages, spa treatments and pedicures - while still not typically strictly necessary -- can often do well in mild recessions.
There are many economic theories behind why people may spend more on such items when times are tough, but one of the simplest is the "substitution effect." In essence, people are viewing those items as cheaper substitutes for more expensive experience-oriented entertainment.
It can be substantially cheaper, for instance, to drive to a nearby spa for a day of pampering than it is to spend thousands on a traditional vacation to an exotic locale. When all is said and done, though, that cheaper day trip may very well provide nearly as much relaxation and recuperation -- with the added benefit of a smaller post-trip financial hangover.
What Can You Do About It?
If you're feeling financially pinched, it makes a ton of sense to cut back on expenses that aren't absolutely necessary. However, basic levels of entertainment and stress relief remain important. To the extent you can find cheaper ways to recuperate and recharge your own personal batteries when times are tough, it's a great idea.
Simple luxuries like personal care items and services just might be a great way for you to get that entertainment and stress relief for less. Just remember, though, that no matter how you recharge, it always feels better if you're not stuck with a debt payment to cover the costs once you're done. In that respect, simple luxuries may very well be better luxuries.
Motley Fool contributor Chuck Saletta owns shares of Genuine Parts. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days.