You see it all around you. Even Americans who have not been directly impacted by the Great Recession have pulled back their spending to some degree, and this is a permanent change. It’s not just a shift to reduced spending, but to a different kind of spending.
It’s not a drastic reduction, it’s not a frantic move, it’s the “New Frugal,” and it’s has come on slowly and steadily as consumers came to the understanding that we’re not going to have a rapid recovery — and perhaps no recovery for some time.
The perfect metaphor for this new reality is the Ritz Carlton’s recent “loyalty” program to market rooms at prices lower than normal. The bottom line: Frugal doesn’t mean cheap, but it does mean less expensive — even for a hotel chain where you were “understood” to be loyal if you were wealthy.
What is Driving the New Frugal?
Beside the obvious, the Great Recession, the New Frugal is driven by demographics. Trends within the wider population have exacerbated the cutbacks in spending.
More people are retiring now than ever before. These retirees are spending less to meet their retirement budget requirements.
At the same time, more kids are graduating from high school and college, and they’re having a tough time finding work. Twenty-five percent of people under the age of 30 now live in their parents’ home.
That means they’re likely buying their new polo shirt at Target Corporation (NYSE: TGT), not Macy’s Inc. (NYSE: M). Worthy of note is that the New Frugal doesn’t mean people won’t splurge occasionally and go to the Ralph Lauren store for a polo shirt, but that Ralph Lauren store is more apt to be at an outlet mall.
Here are a few other reasons behind the New Frugal:
Higher Taxes and Medical Costs
Despite the recession, state and local taxes continue to climb as 44 states are running deficits that must be closed. Out-of-pocket healthcare costs for American workers increased 14% during the past year, and those costs will continue to climb much faster than inflation.
One-in-five Americans is out of work, has dropped out of the work force or works part time when they would rather work full time. More than one-in-three workers was out of work some time in the past year. Obviously, anyone suffering this fate would be hyper-cautious about spending and saving, even if they are now working. Further, we all know someone who is having a difficult time finding a job and the spillover effect is having an impact on the willingness of everyone to spend.
One-in-four Americans is underwater on their mortgage, i.e., their home is worth less than their mortgage. Defaults, foreclosures and late payments are at a breathtaking level of almost 10% of mortgages. And the average home value is down one-third in the past three years, with prices falling again. This makes everyone who thought of the equity they had in their home as their “nest egg” nervous. This situation, too, feeds consumers’ lagging confidence about the future.
The Stock Market
More than half the people who got hit in the market crash pulled significant chunks of portfolio equity out of the market — and they continue to do so. Those losses have been made up in the indices, but not in the portfolios of consumers who continue to have net withdrawals from equity funds and are over-weighting bonds and cash.
All the foregoing observations about the New Frugal add up to a radical hit to, and decline in the confidence American consumers used to always having faith in their country’s economic strength. This situation is best evidenced by the desire to change parties in the midterm elections.
Consumer Reports surveys and our ChangeWave Alliance Research Network surveys show that the consumer is reducing spending. The Street is torn about many stocks in this segment — whether to value them based on revenues or profits. For example, Best Buy Co., Inc. (NYSE: BBY) recently beat on the bottom line big time, but missed on the top line, and the stock rose sharply.
The bottom line for us is clear. This is the place to trade, both short and long in the coming months, as a permanent level of lower revenues hits consumer-oriented companies. Barring a major market rally, this segment will trade based on performance and data more than most other segments.
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