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After the buying binge, consumers at a crossroads

Tue., Feb. 3, 2009

Shoppers newly frugal, but trend may not last

MINNEAPOLIS – For many consumers, the jig is up.

After years of supersizing our houses, cars, meals and closets, Americans’ buying binge seems to be over.

Hung over and remorseful consumers’ overindulgent days may be behind them. Personal consumption this year might fall to levels not seen since 1942, some economists predict. Personal savings are on the rise, too. For the first time since 1952, when the Federal Reserve Bank began tracking it, household debt is declining.

Will this newfound self-restraint lead to lasting change in behavior?

Consumer behaviorists, retail analysts and business leaders believe some budget-motivated changes will stick. Talk abounds of a “new normal” level of consumerism. When we start spending again, people will make purchases based on the environment, family and citizenship, not on hoarding. They’ll go for one really great sweater, instead of a dozen.

But economists predict that consumers will have short memories, based on how the economy has behaved through 10 previous recessions since World War II.

“I’d be very suspect of that argument that we’re going to see permanent change,” said researcher and economist Art Rolnick, the Minneapolis Federal Reserve Bank’s resident optimist. “We think the economy, within a year or so, will be back on its trend rate of growth of 2.5 or 3 percent. And job creation will start up again. If the stock market goes up to even 11,000, a lot of this wealth is recaptured.

“When people feel more secure, they’re going to go back to their old patterns,” he said.

Of course, predicting how 218 million American adults spend money is far more than an academic exercise. Consumer spending accounts for two-thirds of the U.S. economy, and the pullback led to a drop in gross domestic product of 3.8 percent in the fourth quarter, the biggest drop in a quarter century.

Even outgoing Wal-Mart CEO H. Lee Scott envisions a “fundamental sea change in consumer buying” that won’t change when the economy rebounds. Consumers won’t have “the same immediate desire to go back to consumption and debt,” he told attendees of the National Retail Federation last month. That’ll be tough for retailers, but good for society, he said.

“I’ve been worried for a long time that someone in 2007 is selling furniture, and your first payment is 2011,” Scott said in his remarks. “Is that healthy?”

Roger McNamee, a technology investor whose 2004 book, “New Normal: Great Opportunities in a Time of Great Risk,” was published in the wake of the previous recession, says credit-happy Americans spent years avoiding signals that the party was ending.

“Now we’ve got the equivalent of a neutron bomb that took out all the partygoers,” he said. “If people don’t answer this particular wake-up call, and make the adjustment to a more balanced split between consumption and investment, what’s it going to take?”

Still, markets expand and contract all the time. And despite the seemingly gloomy forecast that retailers could close as many as 110,000 stores this year, that still would be fewer than closed in 2000 and represents just 3 to 4 percent of the retail industry, said economist Michael Niemira of the International Council of Shopping Centers.

“The stronger the downturn, the stronger the rebound,” Niemira said in a recent conference call. In strong downturns, “hefty pent-up demand ultimately does come out when economic conditions improve.”

In the end, prices of everyday goods are a more certain predictor of change than consumer’s pessimistic outlooks and high-minded ideals, Rolnick said. Consumers might change their behavior after sustained high prices, but usually not before.

“If you thought the price of gasoline would stay at $4 forever, then you’d recalibrate. You’d want a more efficient car,” he said. “But if it comes back to a $1.80 or $2, you’re going to go back to your old spending habits.”

To wit, reported that trucks and SUVs outsold cars in December for the first time in nearly a year, urged on by lower prices, fat dealer incentives and winter weather. Sales of hybrid vehicles, meanwhile, have dropped off. But sales overall are slow.

On the flip side, for the first time in at least a decade, Americans are asking for smaller homes, according to the National Association of Home Builders. In 1978, the average size of a new home was 1,750 square feet. As of the third quarter of last year, the average size under construction was 2,438 square feet, a drop of 7 percent from the previous quarter.

Pam Goodfellow, a senior analyst with consumer survey firm BIGResearch, foresees a more nuanced level of consumerism. The company’s surveys show growth in some big-ticket items, such as televisions, over the next six months.

“People are going back and rethinking what they’re spending on,” Goodfellow said. “Something like a big-screen TV is seen as an investment in your home. People are spending more time in their home and with their family, so some of our values are going to change, too.”

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