The holiday season is still with us, so the numbers aren't final, but indications are that consumers are still being cautious where spending money is concerned.

Click Image to Enlarge

Consumers have less money to spend, as evidenced by the Federal Reserve’s report on U.S. household net worth. This year’s first quarter number was a whopping 21% less than the same period of ’08. But the atmosphere now is less gloomy, and we expect solid growth in consumer spending next year.

The holiday season is still with us, so the numbers aren't final, but indications are that consumers are still being cautious where spending money is concerned. Overall, the current level of consumer spending is flat compared with the third quarter of last year, and is only moderately better than the dismal fourth quarter of 2008.

The simple explanation for this situation is that consumers don't have any discretionary money. The rate of decline in employment is abating, but the unemployment rate will not hit its peak until the middle of next year. This means that aggregate wage levels are still declining. Housing prices have yet to hit bottom, so asset values remain low. The banks aren't helping matters. Some sectors of the credit markets are improving, but lending to consumers and small businesses remains depressed.

This does not mean that a more robust recovery is not coming, just that the timing will be delayed a bit. Demand for all types of consumer products is expected to register solid growth in 2010 versus 2009. One important positive factor in the spending outlook is the noticeable change in consumer psychology. During the fourth quarter of 2008, the entire economy was panic-stricken. The financial markets were in meltdown, there were massive (and highly publicized) job losses, and household wealth was plunging as the housing bubble burst.

Now the outlook is much improved. Most of the recent news reports are about the end of the recession, and consumers' attitudes seem more balanced with regard to both the good news and bad.

The strongest growth in the near-term will be for products with lower price points and merchandise that is non-discretionary. Health aids and drug stores are benefitting from the increasing efforts to mitigate the spread of the H1N1 virus. Sales of sporting goods and general merchandise products will also post moderate increases in 2009 when compared with 2008. Housing-related items (appliances, furniture, home entertainment, building supplies, etc.), which are more discretionary, will see steeper than average sales declines this year.

 

WHAT THIS MEANS TO YOU

Actual demand is still subdued, but pent-up demand is rising fast. Now is the time to ramp up marketing plans and introduce new products.

Negotiating long-term contracts with suppliers and employees may be advantageous right now. Prices for materials and labor are still relatively low, but they will rise as the economy heats up. Conversely, long-term contracts with customers may prove less desirable.

Products that reduce household energy demand (or actually produce energy) will be amongst the fastest growing markets in the coming years. The battle to reduce consumption of fossil fuels is just beginning.

 

About the Author

Bill Wood, an economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. Contact BillWood@PlasticsEconomics.com.