Thursday, October 8, 2009

Consumer spending

Understanding the limits of on-air analysis, I am still a bit befuddled by some of the things I hear. The one question that I think I find the most insipid is the discussion concerning whether the consumer is back or not. Well, the consumer has never really left, they just bought less and became more value conscious. This was driven by the loss of equity wealth and that wealth is not coming back quite so quickly.

Consumer spending will now start to trend up from the low levels we saw early this year. However, it is not going to "jump" back to where it was during the bubble. The good news is that it doesn't have to for us to have a vibrant economic recovery.

Companies have adjusted their forecasts to a lower level of sales, have reduced staff and locations and are stocking less inventory. These productivity reductions will mean that they will sell most of their inventory at decent margins. Further, the suppliers have also pared back to provide the lower levels of inventory. Now this contraction in the economy has been accomplished and we will find that the companies will start to grow from its contracted point.

The recovery will not mean that we return to bubble levels, but we don't need to and in fact we shouldn't want to. What we need is to do all the things we are currently doing, reduce consumer debt, revalue assets to affordable levels and provide better value for each dollar spent. These activities will lead to a better fundamental economic base and sustainable growth.

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