Consumer Spending Faces Unemployment and Unfair Lending
by Hiland Doolittle
Staring at glum unemployment figures showing six states with double-digit unemployment and another five closing in on double-digit unemployment does little to inspire consumer confidence. The American consumer is hard to read in good times and harder to find in bad times. In today’s consumer world, cash is king and recent reports show that consumer’s with cash want deals.
Amidst the bleak unemployment statistics, a report from the Arlington, Virginia, consulting firm of Watson Wyatt Worldwide, Inc. on April 21st indicated that of 141 interviewed employers, 72% indicated they had trimmed their pre-recession workforces. 42% believed further cuts would be necessary. In addition to lowering payrolls, the majority of these firms are continuing to sharpen their pencils and reducing all operating costs.
72 % of these same companies have a hiring freeze. 22% have reduced contributions to employee retirement plans. Another 22% have cutback employee hours. 60% have frozen employee wages.
To counter these discouraging reports and in efforts to get cash in the hands of consumers, the government has expedited payment of tax returns, extended unemployment benefits and is readying to confront the country’s major credit card companies.
Julia Coronado of Barclay’s Capital explains, “There is a nice policy support to consumer spending. Consumer spending has bottomed but we do not necessarily see a lot of room for growth going forward because the fundamental picture for the consumer is bad.”
Obama To Meet With Credit Card Companies
On Thursday, April 23rd, President Obama will host a White House meeting to discuss the administration’s strong views on credit card abuses and the upcoming legislation to change the business practices of credit card companies. The administration encourages feedback from the lenders.
Ironically, taxpayers have lent credit card companies more than $120 billion since October 2008. In exchange, the government expected increased lending from the credit card companies. Congress has been frustrated that the very companies bailed out by the taxpayers have reduced and closed credit lines, levied excessive fees and have inexplicably and inconsistently raised interest rates.
Credit card defaults are at record highs. Lenders are scrambling to protect themselves, but as Senator Carl Levin of Michigan said, “Some of the very banks we rescued compound the hardships or ordinary Americans with unfair fees and interest charges.” Levin has drafted legislation to halt these practices.
National Economic Council Director Lawrence Summers will chair the Thursday meeting. President Obama will be in attendance as well as executives from Bank of America, American Express Corp. Citigrup, Inc, JPMorgan Chase, Wells Fargo, Mastercard, Inc. and Visa, Inc. among others.
Fees and interest rates will be the chief topics, but there will be other issues. The government is looking for voluntary corrections, an immediate shift toward transparency and quick elimination of deceptive policies. Some banks have already changed their credit card policies. It is expected that credit card policy changes will cost the industry about $12 billion this year and the government would like to see consumers put that money to work.
Senator Chris Dodd of Connecticut said he welcomed “President Obama’s support for our efforts to crack down on abusive and predatory credit card practices. We will only fully recover from this economic crisis when we put an end to the abusive practices that continue to drive so many Americans deeper and deeper into debt.”
Coach – A Different Way
Coach, Inc. has addressed their slumping sales by revising their modus operendae. Coach has moved away from their pricey handbags and accessories and gone to factory outlet type pricing. Recognizing new consumer spending reservations, Coach has increased its new inventory of $200 – $300 items and sales volume has stabilized.
Coach does not believe the current consumer buying mentality is about to change anytime soon. Coach reports that April sales are consistent with their recently completed quarter. Shares rose $2.50 to $20.73 on Tuesday.
Retailers are finding that today’s buyers are cautious and not inclined to buy anything that appears overpriced, even if they need the item. When Coach had high-priced products on store shelves, sales plummeted. When the company brought factory releases to the same stores, sales activity strengthened.
April Consumer Confidence on the Rise?
According to a consumer confidence survey of 1000 randomly selected consumers and conducted by ABC News, the Consumer Confidence Index improved significantly in the past week. The CCI ranges from +100 to –100. The lowest recorded rating was for the week ending 112-01-08 when the survey showed a –54 CCI.
The report reflects great concern about personal finances. Recent announcements that Yahoo and Volvo are furthering their layoffs and the continued bankruptcy talks about Chrysler and GM is troublesome news for the CCI as Americans wonder what is next.
Nielsen Poll Shows Global Boost
The Nielsen Economic Current indicates that in 10 of the 11 national economies, consumer spending remained stable in the past 30 days. Only Germany reported a slight downturn.
The Nielsen Current tracks the frequency of consumer activity, average expenditures per shopping trip, where consumers are spending and how much. Nielsen Vice-President, James Russo, interprets the latest report, “What we have seen is a slowdown in the rate of decline. We have seen a bottoming out. We have seen a move toward neutral.”
Retailers and manufacturers hope this swing is an indication that the economy has found a bottom. A downturn in new unemployment applications would be a very positive sign.
The Skinny on Consumers
While there are some positive signs, there is still a prevailing sense of caution from the consumer. Consumers are looking to save and trying to find ways not to buy. Areas that are show big downturns are out-of-home entertainment and clothing.
As Coach has discovered, products must have perceived value. In the U.S. consumer spending of store brand items has risen 6.4%. In Russia, consumers are avoiding specialty stores in favor of more variety and deeper discounts.
The Economic Current is a compilation of data from Brazil, Canada, China, France, Germany, India, Italy, Spain, the UK and the U.S. The Nielsen report is compiled from 25,420 internet respondents in 50 countries.
One common thread among international consumers is that consumers need to be motivated. From auto sales to technology to personal items, retailers with incentives and with purchase plans that allow for the possibility of a job loss are soothing buyers and attaining their sales marks.
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
