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The Gun-Shy Consumer

We’ve used words like “timid” or “cautious” to describe consumer behavior, but we now rather like the term “gun shy.”  What a great mental image — that of a brash cowboy consumer with a reputation for quick-drawing the credit card at every cash register suddenly losing his swagger.

This is more or less what has happened in the Great Recession.  The Washington Post reports that credit card usage has waned in the past two years, but debit card usage has surged (see “For Gun-Shy Consumers, Debit is Replacing Credit“).  This shows that consumers value the convenience and safety of paying with plastic but have adopted a more responsible way of doing it.  The days of throwing down the credit card with “devil may care” reckless abandon are over.  We’re in a more sober era now, and it’s all part of the process of deleveraging, which continues apace.

The Wall Street Journal echoed these sentiments on Thursday (see “Drought of Credit Hampers Recovery“), though they also rightly point out that this is a two-way street.  Not only are some consumers choosing to spend and borrow less, but many banks are more or less forcing them to by limiting the amount of credit available.  

The Journal writes,

A year after the U.S. economy was brought to its knees by the bursting of the housing bubble, credit for consumers is still being aggressively ratcheted back.

Total consumer credit outstanding, which includes everything from credit-card debt to loans for recreational vehicles, fell $12 billion in August, or at a 5.8% seasonally adjusted annual rate, the Federal Reserve reported Wednesday. It was the seventh straight month of declines, the longest stretch since 1991.

The drop is a stark demonstration of how banks and other lenders are scaling back, owing to their own exposure to the struggling real-estate market. But it also reflects a reluctance by Americans to hold big loads of debt at a time when the job market remains in bad shape and the value of their homes has fallen.

Revolving credit, consisting mostly of credit-card charges, fell at a 13% annual rate, the Fed said.

This downsizing of the retail economy is not without its victims.  A separate WSJ articles reports that “Retail Vacancies Hit Multiyear High.”

In this environment of New Normal, there is less demand for virtually everything.  This means that overcapacity — and the price deflation that comes with it — are likely to be with us for quite some time.

Will we come out of technical recession this year?  Who knows.  By some measures we are already out of recession, though these numbers are, of course, subject to revision.  The truth is, it doesn’t matter.  Whether or not we are technically in recession, growth promises to fall short of past rates.  Our economy was highly leveraged — to an unsustainable level.  It was fun while it lasted.  But now, we’re left to pay the bill.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy