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Consumers Are More Willing to Spend in August than in July

Posted August 24, 2009

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CONSUMER SPENDING: Consumer willingness to spend freely – without constraint – for clothing, food, gasoline, and medical services all increase between July and August. Active shopping, in the form of checking prices and visiting dealers to buy new cars, personal computers and other major goods also increases between July and August.

Specifically, the index that tracks willingness to spend freely for food and other consumables moves up from 67 in July to 76 in August, three points shy of the 79 index recorded for March. The index tracking active shopping for major goods jumps from 90 in July to 100 in August, three points shy of the 103 index recorded for June.

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CONSUMER FINANCES: Consumer willingness to spend increases when they feel the balance between their assets and income versus their debt and spending obligations is favorable.

The Consumer Balance Index (CBI), which tracks consumer perception of the balance between assets and income versus debt and spending obligations, increases from 76 in July to 78 in August.

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INFLUENCES ON CONSUMER SPENDING: Consumer desire to spend is subject to a number of influences such as their: income, confidence, availability of promotional pricing, change in family situation.

The final decision to consummate a purchase is subject to its affordability – the degree to which the expenditure can be made without shifting the consumer’s financial balance from a positive to a negative status. The stronger a consumer’s financial balance, the greater their willingness to spend.

For analytic purposes, consumers are divided into five groups, delineated on the basis of the strength of their CBI. The group with the “Strongest” financial balance has a CBI of 163. At the other extreme, the group with the “Weakest” or least favorable financial balance has a CBI of only 18.

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DEPTH AND DURATION OF RECESSION: Despite the improvement in consumer financial balances as measured by the CBI, hard times continue in August. The August CBI of 78 is 19 points below the pre-recession level of 95 in October 2007 and only five points above the 73 index recorded at the recession’s low point in October 2008.

Few consumers (22%) expect the recession to end within two years. Almost one in ten do not expect the recession will ever end.

The nation is caught in a “Catch 22.” For the recession to end, consumers must increase their spending. For consumers to increase spending substantially and lift the economy out of the recession, their financial balances need return to pre-recession levels.

The financial balances for many consumers are currently depressed as a result of the sharp decline in the value of their assets – such as housing and financial investments – since the onset of the recession in October 2007. Financial balances will not recover until the prices of housing and stocks recover.

Given the current weakness of their financial balances, consumers are inclined to save extra income in an effort to rebuild the value of their assets rather than spend the extra income.

INVESTOR SENTIMENT: The roughly 50% of consumers who own stock or mutual funds invested in stock have soured on the future value of stock. When asked whether they would buy, sell or do nothing in the event the Dow declined by 10%, more investors would sell than buy. In August, there are only 0.80 prospective buyers for each prospective seller; by contrast, in April there were 1.43 buyers for each seller.

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POLITICAL CONSEQUENCES OF THE RECESSION: Almost all (85%) consumers report they are paying attention to the financial crisis. Roughly half of all consumers – 55% in July and 49% in August report they have been hurt by the crisis. Bill Clinton’s admonition “it is the economy, stupid” was truer in February 2009 than in August 2009. Spontaneous mention of the economy as a major national problem has – with the appearance of “shoots of green” and “glimmers of hope” – declined eighteen points from 85% in February to 67% in August.

As the proportion of Americans concerned about the economy declines, the proportion spontaneously mentioning “healthcare – prescription costs, insurance” as major problems facing the nation doubled from 12% in February 2009 to 24% in August.

As the recession and the debates on healthcare wears on, Obama’s performance rating – the percent pleased with his performance in office – decreases, from 62% in June to 55% in July to 51% in August. The percent of Americans who agree that the problems facing the nation are so profound that they cannot be solved no matter who is President rises from 37% in June to 45% in July to 47% in August.

Between June and August, the percent of Americans reporting they lean Democratic dropped ten points, from 57% in June to 47%, while those leaning Republican moved up, from 31% in June to 33% in August. The balancing difference is an increase in the percent who deny leaning toward either party, from 12% in June to 20% in August.

COMMENT: In that 8Sages.com reports change in real time, its postings can appear to be anticipating or predicting change. This may be the case in this posting, as it reports on change in August before August has ended while other indicators are reporting changes in June and July and will not report August activity until the close of the month.

Going forward, 8sages.com will post reports monthly. The September report will be posted on or shortly after September 21, 2009.

TO ASK QUESTIONS: make suggestions or offer your projections of the future, phone Leo J. Shapiro, CEO SAGE: Survival and Growth Enterprises LLC. He can be reached in Tucson at 520 878 0188,