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Consumers Restrain Spending in October

Posted October 20, 2008

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The percent of consumers checking prices and visiting dealers as they shop actively to buy autos, housing and ten other major products drops abruptly from an INDEX of 93 to 81 – the lower limit of its range over the past year.

Simultaneously, the already meager percent of consumers willing to spend freely on food, clothing, gasoline, and medical services drops from its already low INDEX of 74 to 71 – again, the lower limit of its past-year range.

Consumers’ increased reluctance to lay out cash extends to the purchase of common stock. The ratio of willing buyers to anxious sellers in the event of a 10% decline in the Dow Jones Index drops from 1.68 buyers to each seller in September to 1.08 buyers for each seller in October.

This overall shift toward extreme thrift reflects a sharply negative change between September and October in the way consumers perceive the balance between their income plus savings vs. their debt plus spending. When consumers’ financial balances shift negatively, they reduce their spending to an affordable level. Similarly, when their financial balance shifts positively, consumers react by increasing spending.

Our most sensitive measure of how consumers perceive their financial balance is the Consumer Balance Index (CBI). Between September and October, the CBI dropped from 83 to 73 – the lowest level in the past year.

Operationally, information for calculating the CBI comes from telephone interviews conducted each month with a fresh national sample of 480 consumers, who report whether the balance between their income plus savings vs. their debt plus spending obligations is increasing, decreasing or remaining stable.

Conceptually, the CBI treats America as a nation of bookkeepers who note transactions and act aggressively to keep their books in balance. When the balance shifts negatively, consumers cut back on spending. Conversely, they spend more willingly when their financial balances shift positively.

In all, over eight in ten (83%) Americans surveyed in September spontaneously recalled the name of a Republican or a Democratic past President whom they would want to come back to lead the nation.

Because information used in computing the CBI comes from persons and households, we can divide the population into groups that differ in terms of changes in their financial balances.

The overall decline in CBI from 83 to 73 reflects a six-point decline in the proportion of the population feeling their financial balance is “great,” from 19% in September to 13% in October, making a new low. Month to month, in the year just past the percent feeling their financial balance was “great” ranged as high as 29%.

For instance, the INDEX measuring active shopping for autos, houses and other major products ranges from a high of 151 among consumers with “great financial balances” to 87 among those with “good or marginal” balances, to a low of 52 for consumers with “bad or awful” financial balances.

Similarly, the INDEX measuring willingness to spend freely for food, clothing and other day-to-day goods steps down from a meager high of 106 among consumers feeling “great” about their financial balances to a low of 46 among those who feel their financial balances are “poor or awful.”

The ratio of buyers to sellers in the event of a 10% decline in the Dow Jones steps down from a high of 3.15 buyers to each seller among stock and mutual fund holders whose financial balance is “great” to a low of only 0.34 buyers to each seller among those with “bad or awful” financial balances.

Looking ahead, the sharp decline in the proportion of consumers feeling “great” about the financial balances portends:

a sharp decline in purchases of cars, housing and other major goods,
a moderate reduction in consumer willingness to spend freely for food, clothing and other day-to-day items, and
a contraction of the number of investors willing to buy common stocks or mutual funds on further dips in the Dow Jones Index.

As witnessed by the sharp changes between September and October, consumers are willing and able to adjust their spending and savings quickly to changing circumstances.

Our next reading of the CBI, to be posted on or before December 20, 2008 will reflect consumer reaction to the outcome of the Presidential elections, which are sure to disappoint almost as many people as they please.