Tightening our belts

In the face of financila turmoil, consumers develop a new set of habits

October 26, 2008|By Lorraine Mirabella | Lorraine Mirabella,lorraine.mirabella@baltsun.com

Consumers are shopping less, driving less, eating out less and taking fewer trips. With the economy in a tailspin, there's talk of people rediscovering the art of coupon clipping.

The economic turmoil of the past month, only adding to previous housing and credit woes, has consumers scared and pulling back in a big way.

Consumer confidence hit lows earlier this year, and it's expected to go even lower. Unemployment is rising. The presidential election adds its own measure of uncertainty.

"Conditions are very weak and appear to be weakening even further, and confidence reflects that," said Lynn Franco, director of the Consumer Research Center of the Conference Board in New York.

"You've had ... not only tremendous declines in confidence but in people's ability to spend, with stagnant wage growth, diminishing purchasing power," Franco said. "You have home prices and asset prices declining, and tight credit conditions. So all of that was already curtailing consumers' spending. Consumers have retrenched."

In the short term, consumers are changing habits: where they shop, how often they drive or how they spend leisure time. That means a pullback in big-ticket items and on travel- and entertainment-related expenses, she said.

"It's a tough selling environment for hotels, airlines and rental car companies," said Henry Harteveldt, a vice president and airline and travel analyst for Forrester Research Inc. in San Francisco.

Some expect the trends to continue well into next year or longer. And some of the new consumer habits could be more than temporary.

"Behavior is changing dramatically," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. "We're in a different era."

Here are some of the consumer outlooks and habits that have changed, as well as some areas where analysts expect modifications:

Less-confident consumers :

Consumer confidence, falling since August 2007, hit a 16-year low in May before sinking to its fifth-lowest reading ever in July, according to the Conference Board's Consumer Confidence Index. By September, the latest monthly figures available, the index had posted a slight gain, thanks to an improvement in short-term expectations.

But a measure of how consumers feel about current conditions eroded even further. And the business group said the results of its survey, based on a sample of 5,000 U.S. households, did not capture the financial turmoil that erupted in the second half of September.

In the past, Franco said, shocks such as the 1987 stock market crash have hurt confidence only temporarily, on average from two to four months. But there could be a longer-lasting effect, she warned, if the downturn results in significant job losses.

"Much has occurred and intensified over the last several weeks," Franco said. "It looks like things will get worse rather than better."

Cutting back on driving:

Marylanders drove 261 million fewer miles in August than they did in August 2007, a 4.9 percent decrease, the U.S. Department of Transportation said this month. Americans drove 15 billion fewer miles in August, a 5.6 percent drop from August 2007.

August marked the 10th consecutive month that motorists have been driving less.

"This trend is proof that the high cost of gas and concerns about the economy can modify behavior in ways that none of us could have predicted a year ago," said Christine Sarames Delise, a spokeswoman for AAA Mid-Atlantic. "However, now that the price of gas has come down from its $4-a-gallon record high in July, it will be interesting to see if the trend is reversed."

Shopping less:

In mid-October, a 700-point plunge of the Dow Jones industrial average was tied to a grim report of retail sales slumping 1.2 percent in September. That was worse than the 0.7 percent drop economists had expected and raised alarms that a recession might be looming or has arrived.

Consumers have curtailed their shopping.

They're trading down to less-expensive stores. They're buying coffee at Dunkin Donuts instead of Starbucks, eating out at McDonald's instead of Bennigan's, and avoiding department and specialty stores in favor of Family Dollar and Wal-Mart, Davidowitz said. "The consumer is going through one of the most massive shifts in spending I've ever seen," Davidowitz said. "The consumer has spent more than they've made for 10 years. They have made that money up through using their homes as a piggy bank. Now, the consumer is in survival mode."

Cutting back on travel, entertainment, dining out:

Airlines are losing money, cutting back flights, dropping cities and removing planes from their fleets. Fuel prices finally have started to drop, but the economic slowdown has cut into people's ability to travel. Bookings and demand began to fall off after Labor Day.

A Forrester survey of about 3,200 leisure travelers showed that about 36 percent cut their travel spending over the summer because of gas prices and early stages of the consumer credit problem.

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