By Doug Stephens
If you’ve been reading business media lately, you’d be inclined to believe in Christmas miracles. By some accounts, the positive holiday retail sales results are nothing short of the harbinger of true economic recovery. They portray a situation where despite ample reasons to refrain from spending, consumers inexplicably took it upon themselves to pull the economy out of recession, setting the course for renewed growth 2011.
It’s an inspiring story but hardly realistic.
The other media camp prefers to perpetuate the fear that the economy is teetering on the brink of disaster. They would have us believe that any uptick in retail is purely an irrational consumer response fuelled by pent-up demand and deep retail discounts.
The problem with both these perspectives is that while making for provocative headlines, they don’t really convey what’s actually playing out currently or likely to take place as we move into the future.
The truth is that between 2008 and 2010, prompted by fear and over indebtedness, the average American actually saved money. In fact, the personal savings rate improved quite significantly from a low of about 1-2 percent in 2008 to closer to 6 percent in 2010. While this remains below the 50 year average of around 7%, it is almost double the 15 year average of 3.4 percent. And whether these savings went into bank accounts or were being used to pay down credit really doesn’t matter. This de-leveraging is a meaningful change in behavior and a trend that may continue well into the current decade.
Consumption is decidedly more considered, more calculated and more cash dependent. In fact, recent research from Mintel indicates that “in the US, a third of consumers say they’re using debit rather than credit” and debit transactions are estimated to have risen nearly 60% between 2000 and 2010.
Therefore, for the first time in many years, the average consumer’s financial breathing room improved, albeit very slightly. It makes sense therefore, that shoppers might allow themselves a degree of holiday indulgence, given their obvious restraint over the past 2-3 years.
Where this flight to thrift will taper off is unknown but it wouldn’t be beyond possibility for the savings rate to hit double-digit levels. And as long as consumers are bent on increasing their cash reserves and paying down debt, retail growth through 2011 will be flat to modest at best. This isn’t a matter of opinion, it’s just simple math.
Unfortunately, the future isn’t as simple as the headlines might have us believe. The situation can hardly be neatly summed up in the words recession or recovery. It’s considerably more complex and dynamic.
In next week’s post, I’ll share some thoughts on why coming economic reconstruction is anything but a recovery and how astute retailers can not only survive it but thrive in it.