MARKETS / JOHN CRUDELE : Shopper Habits in Slump Offer Investing Clues
Fred still has his job, but he and Wilma are feeling a little less confident about their future since some of Fred’s co-workers were laid off at the rock quarry.
There isn’t any reason for panic, but the couple has decided to ease up on their spending for a while. That leaky old refrigerator in the kitchen can last another year. And the car has only 70,000 miles on it. It’ll be good for another year or two.
And, the two tell themselves, they really shouldn’t go away to the islands for an expensive vacation this summer. Instead, they’ll substitute a few short weekend trips. And Wilma will shop a little more carefully. She’ll substitute cheaper store-brand products for national brands. After all, peanut butter is peanut butter.
My fictitious couple above, the experts say, is behaving like real people would when deep down they sense a deteriorating economic situation coming on.
But the purpose here isn’t just to peep into Fred and Wilma’s lives. For shrewd investors who can sense turns in the economy and determine what gets taken out of the family budget and what doesn’t, this voyeurism could generate valuable investing tips.
“In times of distress, big ticket items like cars, furniture and major appliances . . . are what people cut back on,” says Jason Bram, associate economist at the Conference Board, a nonprofit research organization in New York.
Those cutbacks--and, in turn, the companies whose stocks you should avoid--are the obvious ones.
But what else do consumers who are losing confidence cut out? With the help of some detailed surveys from the U.S. Department of Labor, let’s compare how the buying habits of Americans changed from 1981, when the economy was healthy, to 1982, when the U.S. last found itself in a recession.
In 1981, consumers interviewed by the Labor Department said they spent an average of $3,263 a year on food. A year later--in the middle of the recession--that average expenditure was down to $3,019.
But the 19,000 people surveyed seemed to be cutting back more on what they ate at home than what they ate away from home. They spent $2,424 for food eaten at home in 1981, but just $2,147 the next year. The amount of money they spent on food away from home--presumably at restaurants--rose from $839 in 1981 to $871 in the recession year of 1982.
Here are some more changes in spending habits from 1981 to 1982:
* Home maintenance, down from $200 in 1981 to $172 in 1982.
* Alcoholic beverages, up from $282 to $285.
* Housing, up from $5,199 to $5,543.
* Furniture, down from $247 to $232.
* Major appliances, down from $130 to $124.
* Housewares, down from $35 to $32.
* Apparel, up from $974 to $983.
* Shoes, down from $117 to $116.
* New cars, down from $561 to $523.
* Airline fares, down from $148 to $139.
* Health care, up from $763 to $822.
* Entertainment, up from $797 to $835.
Inflation could be one reason for changes between these two years. Prices at restaurants, for instance, could have increased. So people might be eating out less, but paying more when they do go to a restaurant.
Still, comparing what people spent their money on in those two years might also give some pretty good clues on what will happen when the next recession hits.
It would seem that food companies and airlines as well as manufacturers of houseware products, major appliances, autos, furniture and shoes could be hurt if consumer confidence dips. Restaurants, health-care providers, apparel manufacturers, beer companies and entertainment firms mightn’t be affected.
Before an uptick in March, the Conference Board’s consumer confidence index had fallen to 106.7 and 106.5 in February and January, respectively. That was the first time the index fell below 110 since January, 1988, when consumers were still reacting to the stock market crash.
The index is still nowhere near the 60 and 70 ratings it spit out during the 1982 recession. But consumers, particularly in New England, lack confidence and feel recessionary.
“Typically the savings rate turns up prior to the economy turning down,” says Richard Hokenson, economist and demographer at Donaldson, Lufkin and Jenrette Securities. “The consumer can smell a recession before economists can.”
The U.S. savings rate is currently 5.7%, up from 5% in April, 1989, and considerably higher than the 3% rate of savings a year before that.
