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Consumer Verge on Spending Spree

Posted February 25, 2010

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Impending Spending Spree

Month to month, there are almost across-the-board increases in consumer propensity to spend. The index tracking willingness to spend freely for day-to-day items ticks up reflecting increased willingness to spend freely for gasoline and clothing. This gain, however, is nearly offset by decreased willingness to spend for food and medical services.

The index tracking active shopping for big ticket items jumps 15 points from 87 in January to 102 in February, reflecting the gain in active shopping for autos, furniture and travel. These increases are only partially offset by decreases in active shopping for housing, carpeting and televisions.

There is also a month-to-month increase in investor willingness to buy stocks in the event the prices of the Dow drop 10% or more. The ratio of buyers to sellers moves from a negative 0.96 buyers for each seller in January to a positive 1.21 buyers per seller in February.

CONSUMER SPENDING: January, February

(1,000 telephone interviews of which 500 were conducted in January and 500 in February)


	Jan 2010	Feb 2010	Diff. Jan-Feb
Willingness to Spend Freely for Consumables:
INDEX	77	78	+1
Percent Spending Freely For
Food	39%	38%	-1
Clothing	36%	37%	+1
Gasoline	41%	46%	+5
Medical Services	69%	67%	-2
Active Shopping for Major Goods Index	87	102	+15
Percent Actively Shopping For…
New Car	4%	5%	+1
Used Car	7%	8%	+1
House	7%	5%	-2
Furniture	8%	12%	+4
Personal Computers	8%	8%	0
Major Appliances	7%	9%	+2
New Carpeting	5%	2%	-3
Color TV	9%	8%	-1
Air Travel	14%	19%	+5
Overnight Hotel/Motel	13%	20%	+7
Ratio of Buyers to Sellers of Stock if the Price of the Dow Declines by 10%	0.96	1.23	+0.27

Consumer Financial Situation

America is a nation of bookkeepers who note–though they may not record–all transactions and seek to maintain a favorable balance between their ability to spend (assets plus income) and the amount they actually spend (debt plus spending obligations). When their financial balance shifts negatively, they curtail spending, and when their balance shifts positively they spend more freely.

The Consumer Balance Index (CBI) tracks consumer perception of their financial balance and, by extension, the extent to which they feel they can afford to sustain spending. Between January and February the CBI for the AVERAGE consumer holds constant at 82–nine points up from the September 2009low of 73 and 13 points below the pre-recession reading of 95 in November 2007, indicating that the recession is in the process of remission.

Click here to see graph

There is a strong positive relationship between a consumer’s spending propensities and their feelings about their affluence, security and financial pressure. The stronger a consumer’s financial balance, the greater their propensity to spend and the more positive their feelings about their affluence, financial security and the more negative about their feeling of being under financial pressure.

The mix of products and services a consumer is willing to buy varies with their financial balances. For instance, consumers with the “Strongest” financial balances are much more inclined to spend freely for consumables, day-to-day products, and more likely to shop actively for major goods, big ticket products.

Consumer Financial Balance (CBI) versus Spending Propensity and Attitudes toward Financial Situation: November 2009–February 2010

(1,986 telephone interviews conducted at the rate of approximately 497 a month in the four months ending February 2010)

	Consumer Balance Index (CBI)
	Strongest	Next Strongest	Middle Strongest	Next Weakest	Weakest
Consumer Balance Index (CBI)	163	109	73	36	18
Willingness to Spend Freely for Consumables Index	100	93	78	60	45
Major Good Active Shopping Index	178	102	86	64	49
Affluence Index	157	71	39	24	15
Financial Security Index	129	106	94	59	30
Financial Pressure Index	68	80	176	205	253

Given the differences in spending propensity and consumer attitude toward their financial situation associated with their financial balances, the CBI of the AVERAGE consumer can be a misleading indicator of changes in the propensity of consumer to spend. Changes in the distribution of consumers with different financial balances change consumer propensity to spend and feelings about their finances without changing the CBI of the AVERAGE consumer.

Specifically, between January and February, an increase in the percent of consumers with the Strongest financial balances, plus a decrease in the percent with the Weakest balances, could have increased the CBI of the AVERAGE consumer. In addition, the CBI of the AVERAGE consumer could have increased as the result of an increase in the percent of consumers saving some of their income: (37% in January up to 42% in February) and in the percent of consumers reporting reducing their credit card balances: (18% in January to 28% in February).

These changes in savings and debt plus the shift in the distribution of consumers by their CBI would have improved the CBI of the AVERAGE consumer had not the potential increase been offset by a decline in the financial balances of the remainder of consumers – that is those with CBIs that were between Strongest and Weakest.

Given sensitivity of the CBI to the sort of change just described, the CBI of the AVERAGE consumer can sometimes be a misleading indicator of changes in consumer spending propensity and attitudes toward their financial situation, as is the case between January and February.

Although the CBI held constant month to month at 82, as did the indexes tracking consumer attitudes toward their financial security and financial pressure, spending propensity increased and there was a six-point improvement in the index that tracks consumers’ feelings of affluence, from 56 to 62 for the average consumer.

Consumer Savings and Feelings: January, February

(1,000 telephone interviews of which 500 were conducted in January and 500 in February)

	January 2010	February 2010	Diff. Jan-Feb
Affluence Index	56	62	+6
Financial Security Index	89	89	0
Consumer Balance Index (CBI)	82	82	0
% Saved Money Past Month	37%	42%	+5
% Lowered Credit Card balance in Past Month	18	28	+10
Financial Pressure Index	159	159	0

Looking Forward

Do not automatically interpret the coming surge in retail sales as a sign that the economy is recovering. There is a good chance that the economy and the society it supports are metamorphosing.

Life in the United States, when the economy again grows strongly and continuously, is likely to be very different than it was in 2007 before the recession struck.

TO ASK QUESTIONS request detailed data, make suggestions or offer 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.