What Will They Learn?

Will consumers become cautious and restrained in response to this recession, as marketing experts fear?  Friday’s Wall Street Journal noted: “many companies now anticipate a shift in consumer behavior that persists even after jobs and growth get back closer to normal.”

The Journal quoted Jim Taylor, vice chairman of market research for the Harrison Group: “We seem to be at a cultural inflection point that we haven’t seen since World War II . . . .  People are getting used to being careful, and I don’t know how you undo that.” (See, “Spendthrift to Penny Pincher: A Vision of the New Consumer.”)

Time, of course, is what usually undoes that.  Old assumptions resume their sway in the mind, while established patterns of behavior reemerge from temporary adjustments. Personality is slow to change significantly.  Culture even slower.  There is no particular reason to think it will be very different now.

No doubt the continuing threat of unemployment has a very significant impact on consumers’ willingness to over extend themselves.  As they see friends and neighbors struggling to stay above water, that makes them cautious and anxious.  And since banks, protecting themselves, seem only willing to risk money in the search for their own investment profits, it’s not easy for consumers to borrow or small businesses to extend credit to their customers.

But, by and large, its fair to assume that consumers are waiting to resume the life they knew, to “get back closer to normal.”  But what is “normal”?

In my last post I quoted Newsweek’s prediction that unemployment will stay “as much as 7 or 8 percent even into 2014,” adding George Soros’s comment:  “The average American will not be better off in five years.”  Three out of seven have had their pay cut in last year. (See, December 17, “Economic Man – Unemployed”)  That will crimp the style of many consumers.

So there is likely to be a significant wait until “normal” resumes.  The question I think that market researchers are really asking is will the credit mania resume?  Will consumers be willing to borrow once borrowing becomes an option again?  Will they take out mortgages and home equity loans once they become available? Will they go as deeply into debt as before?  Most likely that will depend on what all other consumers do.

The real question is will cheap money become available again?  Will the government encourage home ownership?  Will the Fed keep interest rates low?  Will banks compete to underwrite the consumer?  I imagine that Mr. Taylor hopes so, as do others in marketing and sales.  They are eager to restart the engine of consumption.

Much as we need robust consumption to fuel the economy, would that be smart?  Or will we begin another cycle, another boom that will end in another bust?