'Apple-Mart' consumers send a mixed message

Despite slumping economy, some rush to buy expensive iPhone contracts. Others limit spending with bulk food purchases.

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With investors reducing their expectations, inflation intensifying, rumors of bank failures spreading, and a weak labor market, it is vital for American consumers to reflect on whether this is a typical economic downturn or a new global economy where the rules of the game have shifted.

Some financial analysts are beginning to ponder whether this is a "transformational" economy where traditional relationships are no longer valid in determining expectations of future economic growth.

If such an economy were to evolve, how we measure supply and demand of natural resources, global credit flows, and investment returns – among other factors – would need to be radically reshaped.

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As economic uncertainty rises, consumer anxiety regarding the depth and length of the current economic downturn is understandable.

But apparently, not all consumers are convinced that careful spending and downsizing should rule their family budgets in today's weak economic environment. Just look at the long lines that formed at Apple and AT&T outlets across the country July 11 when Apple introduced the iPhone 3G.

The new phones are priced at $199 (8 GB model) and $299 (16 GB model) for eligible existing customers as well as new ones. Less emphasized in marketing materials is the mandated two-year contract with a minimum monthly plan starting at $70 a month. That adds up to at least $1,680 for the entire contract period, not counting the phone.

Sales reached 1 million units over the opening weekend – an impressive increase from the 270,000 first-generation iPhones sold during its first two days in June 2007. It took 74 days for sales of that phone (priced at $599) to top 1 million despite a robust stock market, with the Dow Jones Industrial Average nearing 14,000.

Now the Dow is limping along just above 11,000, but that has done little to deter America's iPhone fanatics.

"People want access to their world. The 3G device becomes the center of their world enabling them to carry access to the world in their pocket," says Mark Siegel, a spokesman for AT&T. "Among the early purchasers of the 3G device were early adapters, those who need to have the newest technology, as well as regular people who appreciated the price of a handheld computer that happens to make calls."

Despite the iPhone fervor, consumer expectations and confidence – so fundamental to spending – have turned negative. Visits to department stores are down 6 percent this year, home-improvement store visits fell 10 percent, and office-supply store trips dropped 7 percent, according to Nielsen Media.

While many retailers reported substantial sales decreases in recent months, sales climbed almost 6 percent at Wal-Mart in June and 9 percent at Costco, reflecting the shift in consumers to lower-priced, but quality-branded big-box retailers.

Even in these stores, however, discretionary spending was curtailed in favor of necessities, with 40 percent of Wal-Mart revenues generated from food purchases.

The striking contrast between the apparent carefree spending of an iPhone user and the frugal, bargain-hunting mentality of a Wal-Mart customer is jarring. Behavioral economists may wish to analyze the psychology of Apple loyalists, whose eagerness for the newest technological status symbol continues, despite a weakening economy. Perhaps people who buy Apple phones are better able to accept economic uncertainty than Wal-Mart shoppers.

Nonetheless, today's hybrid "Apple-Mart" consumer sends a mixed message to Congress as a second round of stimulus checks is proposed by Democrats. Since no Congressional discussion will occur until September, consumers are well advised to assume a "transformational" mind-set that includes these five economic tenets:

1. Economic uncertainty will reign. Review your CD investments, seeking higher yields, and shift to separate institutions any amount above $100,000. Rebalance your portfolio to include Treasury Inflation Protected Securities (TIPS) and bonds.

2. Liquidity is critical. Create a six-month cash cushion to absorb potential economic losses.

3. Credit rating is paramount. Consider automatic bill paying to avoid late payments.

4. New debt is dangerous. If you can't pay cash, don't buy.

5. Expenditures should be short-term. Avoid signing long-term contracts and beware of hidden fees.

Dr. Kathleen Connell is a professor at Haas Graduate Business School, University of California, Berkeley.

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