Business

Saturday September 19, 2009

US consumers coming back cautiously


WASHINGTON: US grocery store chain Kroger Co says shoppers are starting to buy national brands again instead of lower-priced store-label versions.

Best Buy Co, the largest US electronics chain, sees sales trends improving and customer traffic stabilising, although people are still gravitating toward cheaper items.

This certainly isn’t 2005, when Americans were feeling flush from rising real estate and stock market values and buying up flashy cars and flat-screen televisions, piling up a record amount of debt in the process.

But it isn’t late 2008 either, when retailers suffered a sudden, steep drop in demand for everything but the bare essentials, driving several large chains – including Best Buy’s competitor Circuit City – out of business.

Think of it as a return to inconspicuous consumption, and perhaps an early indication of how the economy might look as it adjusts to a new era of frugality after the mid-decade boom.

Any improvement in discretionary spending is a welcome development as the economy climbs out of recession. Indeed, Tuesday’s surprisingly strong retail sales figures for August were seen as a strong signal the downturn was over.

But the trends described by these large retail chains put a bit of a damper on the optimism inspired by the sales figures. They are more consistent with the sort of sluggish recovery the Federal Reserve and many private economists expect.

“The recovery will be slow and uneven, and it could take a decade or more for consumers to restore their sense of financial security to pre-recession levels,” said University of Michigan economist Richard Curtin.

Perhaps the most telling comment came from Wal-Mart Stores Inc chief executive Mike Duke, who said at a recent investor conference that customers remained cautious and were shunning lower-quality “throw-away” items.

“This is the new normal. This is not something that is going to change,” he said.

Some of the recent improvement in consumption probably reflects pent-up demand. At Kroger, for example, it remains to be seen whether the appetite for more expensive national brands has staying power or is just a burst of pantry restocking.

“Don’t under-estimate the power of pent-up demand,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in Princeton, New Jersey.

“This is not to say consumers will come back in full force – only that we are likely to see some more upward surprises in household spending in the months ahead,” he added.

Pent-up demand is also a big reason why deep recessions are typically followed by sharp recoveries. Some investors and economists are banking on a big bounce back this time. But the hallmark of those recoveries was a consumer revival far more powerful than what has been seen so far in this episode.

While August’s sales were surprisingly strong, July’s were weak and many economists think the current month will be lacklustre because of the end of the government’s “cash for clunkers” programme that offered incentives to buy new cars.

To be sure, that could very well add up to the strongest quarterly consumption reading since before the recession started in December 2007. But it may still pale in comparison to earlier robust recoveries.

For example, in the quarter that marked the end of the 1953 recession, personal consumption expenditures rose at a 5.3% annual rate, more than triple the pace recorded in the prior quarter.

Following the 1973 downturn, one of the longest since World War II, the spending rate doubled to 6.8% just after the downturn officially ended. In the fourth quarter of 1982, the end of back-to-back recessions, consumer spending jumped at a 7.5% annual rate.

That doesn’t mean the economy won’t turn in a couple of quarters of above-trend growth to close out 2009. In fact, prospects for that look quite promising as vehicle makers and other manufacturers ramp up production.

But there are plenty of reasons to doubt this will be a sustainably strong consumer-led recovery.

In addition to the well-documented pain in the labour market and clamp-down on consumer credit, there is also evidence that wealthy consumers – who account for a disproportionate amount of spending – are feeling unusually downbeat.

Michael Feroli, an economist at JPMorgan in New York, pointed out that sentiment among those earning more than US$100,000 a year “has fallen off the table” in recent ABC News/Washington Post consumer comfort index readings.

“The economy isn’t one man, one vote, so if the upper income consumer is worried that’s going to have a pretty big impact on aggregate demand,” he said. — Reuters

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