Articles

This Recession Packs a Double Whammy on Consumer Spending

 

By Don Wiggins - Jacksonville, FL. Consumer spending accounts for about 70 percent of the U.S. economy, so it’s a big deal. What consumers are currently spending and surveys about their confidence in the future affect the stock market, business inventory purchases, and a host of other forward-looking factors. 

Of course, consumer spending has also been one of the major drivers of the recent economic unpleasantness as consumers retrenched, substantially reduced discretionary purchases, and substituted less expensive items for more expensive items in their budget. 

Consumers obviously cut spending in tougher times, but this time around, there is a second echo  effect that has driven spending lower than in most previous downturns. 

For simplicity, let’s say a family spends $100 per week on groceries in “normal” economic times.  Along comes a housing bubble, and the value of their home goes up — a lot. It makes them feel  rich, and they open a home equity line, or refinance their house and take out cash, or run up credit  card balances. As a result, spending on groceries goes up to $125 as they buy steak instead of  hamburger, or grouper instead of fish sticks. 

Along comes a housing bust. Values plummet, home equity lines disappear, refinances are  impossible, and credit cards are maxed out. What does the family do? First, they go back to where  they started, that is, spending $100 a week on groceries. But there’s a problem. 

Lenders insist on getting their money back with interest. So, instead of just cutting back to the  original level of spending, the family must cut back even more to pay back the debt they  accumulated during the good ol’ days. They cut to $75 a week by going to Dave Ramsey’s diet of  “rice and beans,” and, for variety, “beans and rice.” This is the double whammy. 

How long they stay at $75 a week depends on how much debt they ran up, and whether or not the  breadwinner is still employed. Staying at $75 has a major dampening effect on their spending. 

If they default and don’t pay it all back, it causes more problems. Lenders lose money and can’t  lend to other borrowers, such as businesses, who suffer. The lender’s owners also suffer. And the  owners are people like you and me who have stocks, bonds, 401(k)s and other investments.  The result is that consumer spending, the engine of the economy, has recovered very slowly this  time around. The housing bubble was especially large, and consumers borrowed and spent  profligately. 

Has consumer spending bottomed out? So far, the results are mixed. 

After being mushy for the second half of 2009, there was a small increase in December, though  less than most expectations. For the first couple of weeks of January, spending was up, but went  down significantly late in the month as the stock market dropped. Consumer confidence has also  dropped. 

So the jury is still out on when spending will come back to full speed. But one thing is sure: This  time has been different. 

Don Wiggins is president of Heritage Capital Group Inc. and Business Valuation Inc. in  Jacksonville.  http://www.bizjournals.com/jacksonville/stories/2010/03/08/editorial2.html  Don Wiggins, D.B.A, ASA, CVA, CPA/ABV  http://businessvaluationinc.com  http://www.heritagecapitalgroup.com  904/354-9600  dwiggins@heritagecapitalgroup.com 

Don Wiggins is president of both Business Valuation, Inc., a firm specializing in business  valuations, and Heritage Capital Group, Inc., a boutique investment banking firm focusing on  middle market companies. Headquartered in Jacksonville, Florida, Wiggins has over 30 years of  experience advising clients on a wide range of mergers and acquisitions and finance transactions,  including M&A, sales and divestitures, capital placement, value enhancement, exist planning and  related business owner transitions. He has advised international and domestic companies and  successfully led transactions in numerous sectors, including business services, healthcare,  distribution and logistics and manufacturing.

Since 1989, Business Valuation, Inc. has performed thousands of valuations for professional  service, as well as wholesale, retail and consumer product companies in a variety of industries  including healthcare, transportation, logistics and distribution, manufacturing, technology and  business services.

With more than 30 years of experience, Heritage Capital Group, Inc. has earned a reputation for  negotiating highly successful outcomes in both sell-side and buy-side transactions, mergers and  acquisitions, value enhancement prior to exit or transition, capital placement, debt management  and numerous other business deals. Heritage’s customers include hundreds of business owners of  mid-sized companies in the southeastern United States and, as a founding-member of M&A  International, lead numerous, successful international transactions. The Heritage team’s extensive  transactional and operational experience provides a vital perspective on the most effective means  of maximizing value as measured in the market by either potential investors, partners or buyers.  With a broad reach throughout the marketplace, Heritage Capital Group maintains a keen focus  on the unique needs of owners of middle market companies.

don.jpg
search search
close