Marketing View: Spending Similarities After The Depression Of The 1930s And The Recession Of 2007 - Part IByRaymond D. Matkowsky
To understand the scarring effects of the Recession of 2007 on present day consumer spending, one has to first look at the Depression of the 1930s. The Depression of the 1930s was, of course much more severe than the Recession of 2007. However, those that survived the Recession most likely did not live through the Depression and have no idea as to its severity. To them the Recession of 2007 was the most severe and chilling economic upheaval of their lives. As did their predecessors of the Depression, they swore that their families will never have to go through that again.
Collapse Of The 1930s
The economic collapse of the 1930s in the United States had a staggering and lasting effect on the children of the era. Unemployment was 12.5 million in 1932. By 1933 the average income tumbled by 50%. To save money many families neglected medical and dental care. Many families did not have the money to buy food.
The primary effects on children of the late 20s and 1930s were malnutrition and hunger. The constant uncertainty and seeing their family’s hardship lead to deep and lasting psychological effects. These effects lasted a lifetime and led to alterations in their economic beliefs and buying habits. The parents of these children taught them to save for a rainy day. They were told that a rainy day was sure to come. Many children who survived this period grew into very frugal adults that valued family, savings, and education. They would never want the experiences of their growing up years to repeat again. After World War II this frugality lasted through the 1960s.
Era Of High Savings And Lower Consumption
During the 1950s and early 1960s the children of the Depression were entering adulthood with vivid memories of what it was like during the 30s. The average savings rate between 1950 and 1959 was 11.5% of disposable income. That jumped to 11.7% during the 60s. The household consumption rate between 1950 and 1959 was 69.9%. This went down to 68.8 % of disposable income between 1960 and 1969. The all-time high savings rate of 17% was reached in May of 1975. During these years the savings rate was high and the consumption rate much lower than the 1990-94 consumption rate average of 76.6%. This increased consumption was fueled by a lower savings rate of just 3.4%. The 90s and early 2000s were years of low savings, high debt, and high consumption.
Era Of Low Savings And Higher Consumption
Attitudes of the post-depression began to change in the mid to late 1970s. The savings rate continued to drop. A historically low savings rate of 1.90% was reached in July of 2005. Memories of the 1930s were wiped out in two generations. Consumption was a status symbol and you had to “keep up with the Joneses.” Just two years later, the Recession of 2007 caught many people unprepared just like in 1929-30.
By 2005, U.S. households were spending 95% of their disposable income. What’s worse was that some were borrowing to maintain their consumption habits. This all came to an end in 2007.
Unemployment started 2007 at 5.0%. It reached a high of 10% in October 2009. Just like in the Depression of 1930s, many homes were foreclosed on because the owners could no longer keep up the mortgage payments. People were having trouble putting food on the table. What was different from 1930s, but something that made people’s straits much more dire, was that people were much more in debt and creditors wanted to be paid first before anything else. This only added to the psychological pressure the public was feeling.
Increasing Savings And Decreasing Consumption
The adults of this era acted in the same manner as those that grew up during the depression. They swore that their families would never go through that again. Similar to the 1950s and 60s, the 2010 the savings rate shot up to 5.9%. It was 6.4% in 2011. It hit a high of 10.5% in 2012. The savings rate is back down to an average of 4.9% over the last few years. But, this still represents a drastic uptick to the 1.9% in 2005. The amount of money that people save has an inverse impact on their spending.
The Recession of 2007 had broken the free spending habits of the 80s, 90s, and the early 2000s. In a 2010 report the International Monetary Fund (IMF) estimated that U.S. consumption will range between 89.5% and 91.5 % for the next few years. You will not see 2005 spending patterns in the near future. You will not see consumer spending reaching 70% of Gross Domestic Product in non-inflated terms. If the Depression of 1930 is any indication, you may not see this for a generation or more.
A New Reality For Marketers
Households are saving more. When households save more, they cut back on their current spending for goods and services. This is the new reality. The IMF estimates the consumption in The United States would go down to somewhere between 89 to 91% Two thoughts that must be kept in mind, the 89 to 91% consumption rate is not directly comparable to the 70% rate of the 1950s and that much of the world sells to the U.S..
I would guess that the amount of inflation since 1950 is somewhere around 130%. Therefore it is possible that a present day consumption rate of 91% results in less units being sold than when the consumption rate was 70%. Also, The United States will buy less from the developing world. This will have severe social implications for these countries.
In Part II of this series, we will explore some of the steps marketers can take to deal with the present reality.
If you have any further suggestions, do not keep it to yourself. Help your fellow readers!
If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.
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