Consumer Confidence Builds Slowly

 

Takeaway

  • America's consumer society is fueled by aspiration to move up the economic ladder, but during recessions, this flow is reversed
  • Young people, a key consumer demographic, are adjusting to life without a financial safety net
  • Homeowners could begin to make more informed decisions and learn to budget their spending

Before a recovery can build momentum, consumers have to believe the economy is truly on the upswing. Better yet, they need to directly participate in the upswing by reaching into their wallets.

With lingering unemployment resulting in less income to go around, though, consumer confidence has dwindled for the last three years.

“Fewer people are working, their wage rates are flat, and they’re devoting a greater proportion of their income to paying off their past debt,” says Dr. Lew Spellman, professor of finance at the McCombs School of Business. “So it’s hard to get them to go out and run to the mall and be big-time spenders again.”

But in January, a Gallup survey indicated that 41 percent of Americans believe the economy is “getting better,” up from 38 percent in January 2010 and just 16 percent in the pre-trough days of early 2008.

And in February, the Consumer Confidence Index hit a three-year high, an increase primarily attributed to a bump in consumers’ expectations for the economy over the next six months.

The Great Migration

McCombs Professor of Marketing Dr. Vijay Mahajan has written extensively about consumer behaviors around the world. During a recession, he says, most people eventually come to accept the reality that they can’t spend like they used to.

Mahajan divides American consumers into five groups. People in Group A are the wealthiest; those in Group E have virtually nothing; and the other three groups make up the spectrum in the middle. The consumer society in this country is built on the idea that everyone in the bottom four groups hopes to move up to the next tier.

“Typically D wants to go up to C, C wants to go to B, and B aspires to go to A,” Mahajan says. “What has happened in the recession is that a migration took place. Among these five groups, the A group can take the shock. So A will be fine, but B can move to C, and so on. That transition from B to C, C to D — that creates a problem.”

This reversal of the normal upward flow is problematic because people in the middle groups do most of the shopping, and when they have to cut back, retailers start to suffer.

Companies such as Walmart fared relatively well during the recession because they were able to attract shoppers from Group B, who suddenly found themselves priced out of the more upscale retailers they had been accustomed to.

“People became very price-conscious,” Mahajan says.  “The question for Walmart is, when the economy starts getting better, and people in C start going back to B, will they come back to Walmart? That’s their challenge.”

The good news is that it appears that the downward migration of consumers has most likely gone as far as it’s going to go, even if employment does not quickly return to normal levels, Mahajan adds.

“If you look at the job losses, that tells us that the migration from B to C and C to D has already taken place. So that’s behind us now,” he says.

The Power of Youth

Young consumers make up one of the most critical pieces of the recovery puzzle. They are the base of the work force, and they are typically flush with disposable income. When the recession hit, this group had to make major adjustments in their expectations, Mahajan says.

“Youths are not only a target for many of these products and services; youth is also what fuels our economy,” he says. “Young people are very aspirational. The moment they graduate from college, they want to buy a new car, and they want to get married and go on vacations and honeymoons. And all those dreams disappeared.”

The number of job placements out of college is starting to rebound, and young people are among the most confident in the nation about the prospects of recovery. Gallup recently reported that 52 percent of 18–29 year-olds believe economic conditions are getting better. But there is nevertheless an air of caution among young consumers that was not present before the recession.

“The youth is going to be a little more reluctant now, because they’re not going to jump like they were before. It might take them a few years, because they need a security net,” Mahajan says.

Changing Our Ways?

Mahajan says the acceleration of America’s consumer culture in the days before the recession is evident in the drastic increase in the size of family homes. In the last 15 to 20 years, the average home size has increased from about 1,800 sq. ft. to more than 2,400 sq. ft., by his estimate. And when you have a bigger house, you fill it with more stuff: furnishings, appliances, and so on. This led to the kind of overspending that came back to bite people during the recession.

“I think we’ve learned a lesson,” Mahajan says. “People are going to realize that there’s nothing wrong with an 1,800-sq. ft. house.”

This newfound self-control could perhaps translate into more responsible consumer behaviors across the board, he adds.

“People are going to become wiser,” Mahajan says. “If they’re looking for new homes, they’re going to ask questions — ‘How much is my electric bill going to be?’ ‘How much is my gas bill going to be?’ — because they don’t want to go through that experience again. And they’re going to think twice about how much mortgage they take. It’s quite possible that they might even wait and give down payments so they have some stability.”

Faculty in this Article

Lew Spellman

Professor, Department of Finance McCombs School of Business, The University of Texas at Austin

Lewis Spellman received his BBA and MBA from the University of Michigan and his MA and Ph.D. from Stanford University. His research interests include...

Vijay Mahajan

Professor of Marketing McCombs School of Business

Vijay Mahajan holds the John P. Harbin Centennial Chair in Business at McCombs School of Business, University of Texas at Austin. He has received...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...

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