The 'frugal consumer' era could bring major changes to the US economy

This is the second in a periodic series on economic trends in the United States.

Along with usual adjustments that businesses, particularly small and medium-sized businesses, are making to cope with the economic downturn -- elimination of optional expenses, more cautious inventory purchases, layoffs, etc. -- many are also having to plan for a stark reality.

More and more businesses are beginning to realize that it may take a couple more years, not merely a couple more quarters, for business to return to normal. And for some businesses, there is the possible scenario of customers never returning to previous or "normal" levels.

More economic change than we think?

Moreover, recently, there have been increasing data points that suggest not simply a pull-back in consumer spending, due to layoffs and the U.S. economic outlook, but a fundamental shift in consumer spending that, if it continues, has the capacity to propel enormous, perhaps unprecedented, changes in commerce in the United States.

Economist Peter Dawson calls this new period the era of the "frugal consumer," arguing that unlike previous downturns, in this slump structural, technological, and cyclical factors are shrinking the revenue generated from consumer dollars, not temporarily, but permanently. If Dawson is correct, the U.S. economy will become more production- and quality-of-life oriented, and less dominated by consumer spending, which up to now accounted for 60-65 percent of U.S. GDP, depending on the methodology used. In this new business climate, Dawson says, it's hard to envision the growth of classic indoor mall space: that business line's square footage is already starting to decline and Dawson says "that trend could last 10, 15, even 20 years."

Customers disappear ... everywhere

At the outset of the recession, it was hard to put a lot of real-world meat on the bones for Dawson's analysis and forecast. Consumer spending had declined, but it does in every recession. Housing sales first topped, then collapsed, but one could argue that was an inevitable by-product of an out-of-control mortgage market and reckless mortgage brokers, among other factors. Auto sales declined, but again, that's nothing unusual for a downturn. The consensus was, hey, it's a recession: spending dips. Nothing new there.

But then in the summer of 2008 things started happening at the retail level that many economists and sector observers had not seen in decades, perhaps in a lifetime.

One example: a boutique men's clothier/tailor in an affluent section of Westchester County N.Y., just a 30-minute train ride from New York City, describes how imported Italian suits retailing for $1,200-4,000 stop selling. Canali, Bruno Magli, Dolce & Gabbana, Zanetti, Tombolini, Zanella, Loro Piana, etc. -- they all stay on the racks in record numbers throughout the summer, and the 2008 fall season -- typically a very busy time for upscale clothiers -- is the store's worst ever. Then the drought continues through the winter and into this spring. A mid-priced suit sells here and there, the proprietor told DailyFinance, "but really, no is buying anything. It's unbelievable."

Further, the proprietor said it's almost impossible for him to reinvent his business model: his rent and overhead require the sales of high-priced, designer suits, and he can't compete on price and volume with "off the rack" big-box suit sellers.

Another example, from suburban northern New Jersey, about a 1-hour drive from New York City: a barbershop conveniently located across the street from a commuter train station sees a 30 percent decline in foot traffic (mostly commuters), and a 40 percent decline in haircuts by appointment (favored by moms with kids), in one year. The owner first decreases hours, then quickly lays off one of three full-time barbers.

Again, sales declines are normal in a recession but the above declines are not from typical U.S. communities/towns, but from two upper-income towns in the Northeast where the 2008 median household income exceeded $110,000 per year.

For Dawson, the above are more tell-tale signs of the frugal consumer era. "What I argue is we're seeing lower consumer spending not just due to stagnant wages and high unemployment, but due to a conscious reduction in consumption by all income groups," Dawson said.

Economic Analysis: To be sure, 18 months is not long enough in the social sciences to award the designation of a "long-term trend" or a "trend for the ages," but thus far there's little occurring at the retail level to suggest economist Dawson is way off the mark.

For investors, a frugal consumer era would have enormous implications for regarding the appropriateness of certain investments. For example, do retailers such as Nordstrom (JWN), Macy's (M), even JCPenney (JCP) come roaring back? Does the new era mean several restaurant chains will close?

For small business owners, it's already forced them to think the unthinkable: they're now required to project their business's condition if sales do not rebound in one, two, three years. Some, through cost cuts and business model adjustments, will be able to adapt to the new environment and will manage to survive; others, however, very clearly will not.


Financial Editor Joseph Lazzaro is based in New York.

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