Many have said that mid-2008 to early 2010 were some of the worst economic times since the Great Depression. Some might suggest this is still the case, and with a national unemployment rate lingering at around 10.4%, it’s hard to argue. Either way, it’s obvious that the average American worker is experiencing some financial strain. Trends show that people have been saving more, spending extra time on comparison shopping, and demonstrating an increased interest in stretching their money further. Historically, American shoppers have been almost hedonistic in spending but recent findings point to a sweeping change in attitude toward personal finance. It’s the era of a new type of consumer: the frugal shopper. And it may be here to stay.
One of the strongest indications that American consumers are becoming more careful with their money is the recent upswing in the personal savings rate. MarketWatch reports that in 2009, “U.S. households socked away most of the extra income they got in January from annual cost-of-living raises, boosting the personal savings rate to a 14-year high.” The figure is currently just under 5%, which represents a significant increase over the preceding several years when it was at an abysmal 0.1%. MarketWatch also noted that, “Despite the third straight decline in income from wages and salaries… real disposable incomes (adjusted for inflation and after taxes) increased 1.5%.” This indicates that workers shrewdly decided to save their extra money rather than spend it on extravagances, unlike in years prior.
Former Federal Reserve Board governor Lyle Gramley has argued that recent financial difficulties have taught Americans the true value of personal savings: “Consumers have learned a bitter lesson that their past behavior takes them way out on a limb that might get sawed off. They can’t count on the increase in the value of their home or their 401k to do all the saving they need to fund their retirement years or to educate their children or for medical contingencies. They’re going to have to do some of the savings themselves, so I think that will motivate a gradual rise in the savings rate,” he said according to BankRate, adding that he wouldn’t be surprised to see the personal savings rate hit 8% in the near future, a level not seen since the post-depression years of 1950’s-1980’s.
In addition to an increase in personal savings, there has been a fall in consumer spending since the start of the recession. In November 2008, CNN Money reported that, “…spending by individuals fell by 1% last month, after declining 0.3% in September. It was the biggest decline since September 2001.” In late February of 2009, CNN Money published a follow up report stating that, “…a Commerce Department report showed spending by individuals fell 1% last month.” Recalling that 2009 was the year personal savings rose to considerable heights, we begin to see the attitude of the modern consumer: save more; spend wisely; live frugally. Mark Vitner, economist at Wachovia, echoes a similar opinion, telling CNN that, “…consumers are in a mood to rebuild their savings but not to go out and spend.”
The recent trend in consumer frugality doesn’t only show consumers spending less, it shows them spending smarter. Strategy-Business reports substantial increases in coupon usage and CNN reports an 11% increase in coupon redemption at stores such as Walmart and Target. Google Trends, a web service that monitors the popularity of Internet search phrases, indicates massive spikes of interest in phrases such as “save money,” “tips for saving money,” and “budgeting tips.” Such patterns illustrate an increased concern for thriftiness and financial caution.
Despite the obvious personal benefits of careful spending habits, some experts feel this new trend might actually inhibit economic growth. Aaron Smith, a senior economist at Moody’s has raised this concern with the New York Times: “If households are shying away from spending, what’s going to cause businesses to start spending again?” Indeed, businesses ultimately need consumers in order to expand, create jobs and stay in the black. But other analysts feel that the new frugal attitude toward spending will be a positive change in the long run. The New York Times quotes Greg McBride, senior financial analyst at BankRate.com, speaking from the opposite side of the issue. “If American consumers are less indebted, live within their means and have more money in savings, they are better positioned to spend on a sustainable basis for years to come. As painful as that is economically in the short run, these developments will better serve us in the long run.”
Whether this trend is dangerous or beneficial, many experts agree that the new attitude of frugality is here to stay. Before the recession, many Americans were able to get by without a concern for having to save. But now that these consumers have adjusted to living conservatively, they have most likely experienced the benefits of scrimping, such as the stability and security it offers. Whether or not they will need to do so in the future might not be as important as whether they choose to anyway.
Strategy-Business’s analysis of Booz & Company’s 2009 consumer survey found that, “…frugal behaviors, such as reducing or deferring consumption, trading down to lower price points, purchasing “private label” brands (typically the house brands of retail stores), and shopping at discount outlets, are hardening into habits.” Charles Brown, co-chair of the Promotion Marketing Association’s Coupon Council, sees logic in this: “I think that what we’re seeing is a behavioral change in the consumer that could have lasting effects,” he told CNN, “…if you shift buying patterns and enjoy benefits of doing that, you will likely continue in that pattern.” And while we cannot be certain of the long term impact the new frugal consumer will have on the business landscape, what’s certain is that his arrival marks a definite turning point in our economic history.
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