Through a special arrangement, presented here for discussion is an excerpt from a current article from the Retail Prophet Consulting blog.
It seems that each week experts sift through the tea leaves of economic indicators looking for even the faintest sign that the fabled "recovery" has begun. The problem with a speculative view of recovery is that it's oddly similar to the shortsighted behavior that brought on the recession in the first place.
In order to really understand our current problem, we need to look back as far as the late 1970's. It was then that many of the causes of our current situation were born.
An exhaustive study by law professor Elizabeth Warren found that the average American family in 2005 was actually significantly further behind economically when adjusted for inflation than the same family in 1979. Despite many women entering the workforce, percentage growth in wages remained largely stagnant as the cost of living escalated tremendously. After paying for their basic needs, the average family had less money left over at the end of the day than they had almost 30 years earlier despite having more family members working.
This fact, however, seems completely incongruent with the level of consumption and spending that was taking place in most parts of North America throughout that period, particularly the fairly rampant spending after 2000. If in fact, consumers had less discretionary income, then where was the money coming from to fuel this spending?
The answer lies in a leveraging of historic proportions that began in the 1970's but really hit stride in the mid 1980's. Throughout the period of 1970 to 2005, the average personal savings percentage went from 12.5 percent to negative one percent. Institutions and governments were following the same course, running up dept and deficits the likes of which were never thought possible.
During the week of October 6, 2008 the entire house of borrowed cards collapsed and the consumer found themselves caught. Their investments declined, including in many cases their only real nest egg, their home. They had no cash in the bank and a mountain of unforgiving debt. And on top of it all they now had the added worry of job loss to contend with.
What's followed is a period when personal saving rates rebounded and continue to rise even now. It's that upward trend in savings that has had even the most aggressively discounting retailer scratching their head as to why their goods aren't selling. The consumer is rebuilding their war chest. How long the savings rate will continue to push upward is unknown but a return to a double-digit percentage isn't inconceivable.
What all of this amounts to is that the economy will only begin to heal in a real way when the average consumer feels decidedly less vulnerable and scared. This means a suitable amount of cash in the bank, relative job security and signs of sustained growth in the value of their investments and holdings. Until these things are firmly in place, any potential recovery will be stymied. It took decades to get into this situation. Recovery could take many years and be painfully gradual. There is simply no cogent argument for a fast recovery.
Discussion Questions: How should strategies change for retailers during this recovery versus those coming out of previous economic downturns?