Lack of consumer confidence? Lackluster spending is also due to a new frugality
Consumer confidence has dropped for the second month in a row. That doesn't bode well for consumer spending or a strong recovery. But what if part of the meager spending trend is because some consumers, such as yours truly, have gotten used to spending less and saving more?
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On Tuesday, the Conference Board reported that consumer confidence in the economy fell in July for the second month in a row – this after steadily increasing in the spring.
“Oh, no,” I thought, as I listened to the radio blurb on my way home from the office. How Americans view the future is an important part of economic recovery. If they’re not hopeful about the economy, they’re not going to spend. If they’re not spending, businesses delay investing and that means delayed job creation. [For a Monitor editorial on how to boost consumer confidence, click here.]
Then I began to wonder about my own confidence level. I realized I’m not spending nearly at pre-recession levels, when I had taken out a home equity line of credit to add a front porch to the house. But it also hit me: My new frugality has little to do with consumer confidence. It’s because of changed spending and saving patterns.
True, my confidence nosedived right along with the stock market in the fall of 2008. The journalism industry was also in free fall, so I worried about two things: job security and retirement savings. My cash savings couldn't sustain more than a couple months of unemployment, so I started saving like mad. No more eating out. Bag lunches. No fancy vacation.
Since then, journalism has settled down and the stock market has improved. But I find I’m still packing a bag lunch most days. And I’m still saving more, having upped my automatic retirement contribution.
A planned vacation to Nova Scotia this summer has been scratched. This being the last year for the federal energy tax credit, I decided to finally replace the wheezing, 21-year-old AC system at home. In the past, I would have added this to the home equity line of credit. But I just couldn’t bring myself to do that now that I’ve whittled the balance back down to zero.
Everyone has a different financial situation, and many people can’t afford to save now. It’s still about survival. But Dennis Jacobe, chief economist at the Gallup polling organization, tells me I’m not alone. Apparently, some Americans now regularly spend more frugally. This is the “new normal,” Mr. Jacobe says.
Of the 50 percent of those who tell Gallup they’re spending less these days, two-thirds are doing so because this is their new normal spending level. About one third say it’s a temporary thing (that’s where consumer confidence comes in).
Both motivations – whether confidence or a new frugality – point to a slower economic recovery. But instead of feeling “oh, no” about my new spending attitude, I should realize it’s good for the economy over the long term, according to economists. Increased saving shores up personal balance sheets, and that puts the economy on a more solid footing, making it less crisis prone.
Even in these difficult times, Americans are managing a personal savings rate of 4 percent. That’s up considerably from the 1 to 1.5 percent before the recession. If it’s sustained, it will have a “meaningful, positive, long-run impact,” says Karen Dynan, an economist at the Brookings Institution. She adds, though, that ideally, households should be saving even more, 7 percent or higher.
So it turns out I’m making a “meaningful” contribution to the economy in the long run. I’m feeling better already.