Nervous Consumers Go to the Mattresses

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Will Clouds Lift in 2013?

Last month, when the Commerce Department released its report on December 2012 personal income, spending and savings, there was barely a mention of it in the usual financial corners – which didn’t faze me much, since these figures are usually nothing to write home about.

After looking at the numbers, however, I did something uncharacteristic: a double-take.

Personal income rose by a whopping 7%, its biggest monthly jump in six years. Great news for retailers, who were offering tempting Holiday price promotions everywhere you looked, right?


Not exactly. Though this kind of income windfall usually burns holes in the collective consumer pocket, spending grew by only 3.6% in December, continuing its gradual slide of the last few months. In other words, people had locked their wallets in the drawer.

The personal savings rate, or percent of after-tax income that people did not spend, soared to a heady 6.4% in December, its highest level in two and a half years. Total personal savings more than doubled.


Why did people save, not spend, their increased income? Because they knew they’d be needing it.

\"TheThere seems to be frustration among consumers over the sluggishness of the economic recovery. The Consumer Confidence Index has been dropping for the past three months, pretty much erasing any gains it enjoyed earlier in the year. Lynn Franco of The Conference Board, the organization that tracks the index, said “…Consumers are more pessimistic about the economic outlook and, in particular, their financial situation.”

It seems that 24/7 news coverage on the looming fiscal cliff and the debt ceiling got us all feeling overwhelmingly vulnerable. Then when folks saw their first paychecks in January, worries turned to reality. Franco commented “The increase in the payroll tax has undoubtedly dampened consumers’ spirits, and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock.”

The job market isn’t helping much, either. Even though over 400,000 jobs were added to the economy in November and December, resulting in a slight dip in the U.S. unemployment rate to 7.8%, many of these were seasonal jobs in retail and shipping, which as we’ve seen, doesn’t always lead to full-time employment. Sure enough, January’s job increase of 157,000 – less than half last January’s figure – was disappointing, and bumped the unemployment rate up to 7.9%


So Americans have been putting money away for a rainy day. Some individual investors started to tiptoe back into stocks, according to recent reports, helping markets finish the year with a bang. Others paid off debts, though it appears that consumers, at least for the time being, have finished deleveraging and, as the chart below shows, are managing to keep total revolving consumer credit growth at microscopically low levels.

\"TheIt seems, however, that the bulk of the increased savings has stayed in liquid form which, given today’s infinitesimal interest rates, is tantamount to stuffing it under the mattress.

That increased savings is not going to stay under people’s mattresses for long, though. With the New Year came increased tax burdens and lower take-home pay. The elimination of the payroll tax credit affected tens of millions of Americans, not just the One Percenters. Personal disposable income will by definition start to decline with the higher effective income tax rates.

In other words, the rainy day has arrived, and at least for now, people don’t see the clouds lifting any time soon.  How should retailers approach the coming months? Robin Lewis, CEO of The Robin Report, offered this response: “Well. I could make a sarcastic remark like retailers should simply continue, or even accelerate, their insane price discounting to capture whatever “crumbs” are out there (since the pie is not growing at best, and will possibly shrink), or I could suggest they load up on umbrellas and hunker down.  Not very encouraging suggestions, but I can’t find any sunshine in the year ahead.”

Until sustainable employment growth picks up, and until some of the country’s budgetary issues get resolved, people will be hesitant to take on more than they can comfortably handle. They will continue to shop carefully and according to need.

Those marketers who create compelling shopping experiences, and who offer unique and innovative products and services, and at good value, stand the best chance of gaining market share in the current no-growth, low-spend environment.

In the meantime, Macy’s is having a huge President’s Day Sale: on extra-thick mattresses.












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