WEDNESDAY OCTOBER 7, 2009

Death of the Consumer?

The doomsayers can't help themselves.  The economy will never recover, they say, because the consumer is dead!  They correctly note that consumer spending constitutes roughly 70% of economic activity.  With high debt loads, contracting credit, underwater mortgages and high unemployment, the consumer, they claim, will never will never spend again.  Certainly, given these circumstances, it is not surprising that the consumer has retrenched.  However, this does not mean the consumer is dead.

The 70% consumer spending number is constantly cited as an all or nothing proposition.  Either the consumer is buying jewelry at Tiffany's and flat screen TVs at Best Buy or they are burying every penny in coffee cans in the yard!  Common sense tell us that is not the case.  Indeed, 50% of the 70% spending is not discretionary.  Think about your family's budget.  We all know times are difficult and are watching our budgets carefully.  However, we still need to eat.  We still need to cloth our kids.  We still need to put gas in the car.  And yes, it's that time of year again, we still need to heat our homes.  For most families, the majority of their spending is not discretionary.   While consumers are likely to remain cautious for the foreseeable future, spending is not and can not drop to zero!  It is hard to see how it could drop much below 50%.  If the economy continues to show signs of life, consumer spending could recover quickly.  It doesn't have to go from 0 to 70 in three seconds!

Yes, on the margin, the new found frugal nature of the consumer is a negative for the economy.  But a catastrophe it is not.  It could be that the the other 30% of the economy, Corporate America, will need to pull us into recovery.  Looking at the strong financial balance sheets and low inventory levels in the corporate world, that is what appears to be happening at the early stages of this economic recovery already. 

POSTED AT 1899-12-30 11:48:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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