The Silver Lining in Low Consumer Sentiment

Everywhere I look today I’m finding results from newly published studies and indexes’ showing that American consumer confidence is in the toilet. Here are a few that caught my eye:

• The Consumer Confidence Index (CCI) plunged to 64.5 in March (down from 76.4 in February), the lowest since a 61.4 reading just before the Iraq invasion in March 2003.

• The present situation index (a subset of the CCI), which looks at current conditions, slumped from 104.0 in February to 89.2 in March, its lowest reading since December 1973 when it registered 45.2 amid the Arab oil embargo and Watergate scandal.

• According to the S&P Case/Schuller Home Price index of 20 key markets, U.S. home prices dropped an average of 10.7% in January. The survey’s 10-city index fell 11.4% year-over-year, its steepest decline since its inception in 1987.

• According to Federal Reserve Statistics released 3/7/2008, consumer credit increased at an annual rate of 3.25% in January, revolving credit (credit cards) increased at an annual rate of 7% and nonrevolving credit (car loans, etc.) increased at an annual rate of 1%.

If these indexes are any indication of what is in store for the future of our economy, there is definitely bad news in store for retailers targeting the middle class because these consumers are apt to spend less and save more, or at least set more aside to pay off debts during times of low or questionable consumer confidence.

Perhaps this is the eye opener that American consumers need.

With horror stories surrounding us about suffering credit positions, mountains of debt and home equity loss, our economy will be well served if many of the consumers around us would stop leasing new cars that they can’t afford and pay off some of their furniture and electronics before upgrading to the next generation iPhone.

The basis of this theory is that if Americans go with their gut instinct which is telling them that our economic outlook will get far worse before it gets better, then they should stop spending as if they just signed a deal with Roc-A-Fella Records and consider living more within their modest means. While the near term impact on retailers who target the middle class will be detrimental, in the long run if consumers are able to pay down their debts and buy more of the things that they need with cash, their consumption will cost them much less.

But what about the impact on those businesses who currently target the middle class and the jobs that will be lost if they are forced to downsize?

The encouraging answer to this question is that they won’t necessarily need to downsize and/or eliminate jobs, they will simply need to focus their targets on serving markets at more extreme ends of the economic spectrum. By this I’m referring to products and services that fulfill the needs of ultra-luxury markets or the needs of consumers on ultra-low budgets. By restructuring their business models and targeting new audiences, these businesses will continue to thrive and the economy will stabilize. Most importantly, American consumers will dig themselves out from under mountains of debt and find themselves in positions of positive cash flow.