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- When Americans feel their finances are teetering out of balance, they curtail spending and scratch for income in an effort to restore their ability to meet their financial obligations.
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Consumer spending, eroded by five consecutive months of recession, is further depressed in March as prices surge—particularly for must-buy products like food and gasoline. There is a 15-point increase—from 62% in February to 82% in March—in the percent of consumers who report they are experiencing higher prices.
Compounding the damage to spending power from higher prices, the percent reporting declining income jumps four points from 18% in February to 22% in March. And fewer consumers in March (38%) than in February (43%) report they had money left over for savings.
As prices rise and incomes decline, the percent of consumers reporting they have less income than they need to live comfortably moves up steadily: 26% in December, 30% in January, 31% in February, 33% in March.
As the double drumbeat of bad news about the economy combined with the erosion of their own spending power continues, the percent of consumers who say they believe the nation is in recession move up from 62% in February to 69% in March. A 53% majority in March – up from 44% in February - believe the recession will continue beyond 2008.
Consumers experience a recession personally when they conclude they can no longer afford to sustain their current level of spending. The nation experiences a recession when economic activity slows as consumers bring their spending down to affordable levels.
The Consumer Affordability Index (CAI) that tracks how consumers feel about their ability to sustain their current level of spending finds wide differences in the impact of recession on different consumer segments.
Upper class consumers (defined by per capita income) remain relatively unaffected by the recession and price surge (CAI=117). Middle class consumers teeter on the edge of recession (CAI=97). Working class (CAI=83) and poor (CAI=76) consumers are deeply affected by the recession.
In their effort to contain spending within an affordable level, consumers change what they buy and where they shop.
To save money on a must-buy product like food, there are across-the-board increases between January and March in the percent of consumers who report: using coupons (55% to 59%); buying private label (49% to 52%); reading ads for supermarket specials (54% to 56%); stocking up at warehouse stores (30% to 32%); and buying lower-priced alternatives rather than their favorite brands (39% to 44%).
Consumers strategize to save money on gasoline (described in “$4/Gallon Gasoline”).
Given price inflation, increases in the percent of consumers trying to cut back on spending for food or gasoline do not necessarily result in corresponding declines in reports of retail sales.
Ironically, inflation in food prices has a marked beneficial effect on the profitability of retailers of must-buy products like food and gasoline. Rising prices let retailers benefit from the appreciation value of their inventory and from their ability to raise the prices without experiencing a corresponding increase in the fixed costs of their operations.
By contrast, the recession hurts manufacturers and retailers of products such as clothing, furniture, televisions, and new cars that consumers can defer buying.
Women (with a CAI of 85) are more affected by the recession than men (CAI=96). The incidence of personal recession is lower among consumers with higher education than among those with less education (CAI=96 for college grad; CAI=92 for “some college”; CAI=84 for those with high school diplomas or less).
The proportion of consumers spontaneously naming the economy as a major problem facing the nation has spiked in the last two months: 40% in November, 44% in December, 47% in January, 64% in February, and 63% in March.
Both those who lean “very strongly” Republican or Democrat name spontaneously the economy as the major problem facing the nation (68% Democrats and 46% Republican), over any other problem.
Public concern with the economy is attracting the attention of the federal government, which has begun to intervene actively to ameliorate the effects of recession.
8SAGES.com continues to track the economy and explore the effects of recession and inflation on various segments of the consumer population. Contact 8SAGES.com with questions or with requests for being alerted to new developments.