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Consumer Financial Balances Sink Close to Recession’s Low

Posted September 29, 2009

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CONSUMER FINANCIAL BALANCE: The Consumer Balance Index (CBI), which tracks consumer perception of the balance between assets and income versus debt and spending obligations, drops from 78 in August to 74 in September, which is just a point higher than the recession low of 73 reached in October 2008.

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DEPTH AND DURATION OF RECESSION:

Despite government announcements that the recession is ending, consumer financial balances as measured by the CBI turned negative in September. The September CBI of 74 is 21 points below the pre-recession level of 95 in October 2007 and only one point above the 73 index recorded at the recession’s low point in October 2008.

Few consumers in September (24%) expect the recession to end within two years. Almost one in twelve (8%) 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 to return to pre-recession levels.

The consumers’ 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.

Click here to see table

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.

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 September before September has ended, while other indicators are reporting changes in June, July and August and will not report September activity until the close of the month.

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