The Great Recession is changing our behavior–in ways that point to slower growth for a longer period of time
Has the Great Recession been long enough and painful enough to change behavior in the way that the Great Depression did?
I think the answer is, Yes. In some obvious and other much less obvious ways. One of the least obvious is also the most ominous change—because it has the potential to depress economic growth in the United States and the world’s other developed economies over the next decade when growth will be already in scarce supply.
The Great Depression was long enough—in the United States 1929 to World War II—and painful enough—25% unemployment in the United States—to change the behavior of all who lived through it.
I think we all know what the lessons of the Great Depression were. My parents, for example, born in 1917 and 1920, respectively, were extremely debt averse—a reflection, I think, of watching my grandparents almost lose their house in the 1930s when they couldn’t pay their $3,000 mortgage. At the height of my parents’ financial recklessness, they had two credit cards: a gasoline credit card they carried when we took our cross-country family car trip in 1965 and a Sear’s credit card that my Dad used to indulge his love for riding lawnmowers. They saved so that they could send their two sons to college without borrowing. My Dad worked at the same company from the age of 17 until he retired—at least partially, he told me once, in reaction to his experience of finishing school and not being able to find any job. They inherited some shares of ExxonMobil (XOM) from my grandfather who worked there, but on their own they never bought a financial asset riskier than a CD or a savings bond. They managed to live comfortably in retirement and to leave a respectable estate to my brother and myself.
What I call the Great Recession—which began in December 2007 according to the National Bureau of Economic Research and which feels like it is still in effect even if the U.S. economy is growing again—isn’t nearly as long—so far—or as deep—the official unemployment rate peaked at 10.1% in October 2009. (The Great Recession has been much deeper in some European economies. In Spain, for example, the official unemployment rate hit 24.4% in April, for example. In the U.S. the Economic Cycle Research Institute is still predicting that the U.S. economy will slide back into recession in 2012.)
But it has been long enough and painful enough so that I think it’s worth asking if the Great Recession has produced any lasting changes in behavior like those that resulted from the Great Depression.
I’d break down the changes produced by the Great Recession into three broad groups. The first change, the most obvious and easiest for investors to adapt to is in consumer purchasing. The second, also reasonably obvious, is in thinking about work and the nature of a career. The third, most powerful in its effects and the least obvious, is the way that the Great Recession has undermined existing belief in financial security. That decline in real and perceived security is likely to change where people put their money, what kinds of returns they think they can count on, and, therefore, how much money they think they can spend and how much they have to put away. That last is likely, I’d argue, to powerfully depress consumer spending for at least a decade just as the world’s developed economies are most in need of every tenth of a percentage point of growth they can get.
Let’s start with consumer purchasing.
As you might expect the Great Recession has made consumers much more price conscious.
That means that offering a reasonably comparable product for less is an attractive proposition. You can see that at work in the current McDonald’s (MCD) campaign for its premium coffee. A premium cup of coffee for just $1, McDonald’s ads currently promise. The purpose here is to peel off some part of the Starbucks (SBUX) market by promising a premium coffee experience for much less than you’d pay at Starbucks. Of course, the McDonald’s coffee experience isn’t comparable to walking into a Starbucks and ordering a double shot latte with skim, but McDonald’s is betting that in the Great Recession some part of the Starbucks market will be willing to trade down to the McDonald’s premium coffee experience if the price is right.
The success of this kind of appeal is by no means guaranteed. First, Starbucks is fighting back by offering consumers the option of creating their own Starbucks experience for less by buying Starbucks coffee—either in bags or in capsules that fit Green Mountain Roasters’ (GMRC) Keurig brewing systems. (Dunkin’s Brands (DNKN) Dunkin’ Donut chains has also begun selling Green Mountain Roasters K-Cups.)
Whether its coffee or air travel (where extra-legroom economy is not just a revenue enhancer for airlines but also a new price point below business or first class) or car rentals (where Zipcar (ZIP) offers cars for less to consumers who don’t need them for an entire day) or retail chains such as Zara (owned by Spain’s Inditex (IDEXY)) offering fashion with reasonable quality at a reasonable price, I think you’re seeing a lot of experimentation as companies try to figure out the best positioning in the Great Recession marketplace. Don’t assume that all this involves simple-minded pricing cutting. The effort right now is to find the right value proposition—and that means, so far, possible success for businesses that charge more—such as Whole Foods Market (WFM) or Annie’s (BNNY)—but that also deliver what is perceived as higher quality at the right price.
Finding the correct price point is difficult right now and getting more difficult because the Great Recession has accelerated the move toward what I’d call ‘individualized pricing.” This is an extension of the coupon clipping that my Mom would pursue with such discipline when the weekly supermarket supplements came out with their “Buy one ham with this coupon and get a package of our hotdogs for 50 cents off” offers. But it’s an extension that’s powered by the Internet. It means that, much to the discomfort of a Best Buy (BBY), a consumer can use a brick-and-mortar store as a showroom to examine and compare cell phones or flat screen TVs and then use the Internet to find the best price using one of many comparison tools. But the process doesn’t stop there. A majority of the below 30-year-olds that I know don’t buy anything until they’ve done not just an Internet price comparison but also an Internet coupon search for discounts. It’s as if my Mom could not only compare the prices for Star-Kist tuna at A&P and Acme and look for the best deal in the Thursday circulars, but also do an Internet search to find out what company or site was offering the best coupon discount at that moment. (My Mom would have loved it.)
So a company doesn’t just need to offer the best price in its local market at the time when the consumer is contemplating a purchase, but also to beat all competitors available on the Internet in a constantly changing matrix of prices and discounts.
Unless you’re a consumer company with a very clear brand identify and price proposition (think Apple (AAPL)), this is a recipe for a never-ending price squeeze.
The effect of the Great Recession on career patterns is still emerging but from what I see it’s a more profound change than what the Great Recession has produced in consumer behavior. My career pattern has certainly been very different from my Dad’s—he worked at one company all his working life whereas I’ve changed employers more than once and even shifted industries two or three times. And it looks like the next generation or two shows another new pattern.
Two things seem to characterize work in the Great Recession. First, for more and more young workers, work consists of not just one job but of a number of jobs cobbled together into a whole. It may be a number of part time jobs none of which comes with benefits or any real security. The whole—two or three jobs during a regular working week–adds up to full time work, but there’s not much sense that the whole is stable and not much faith that any one of those part-time jobs will turn into a full time gig.
A significant number of the younger workers that I’ve talked to during the Great Recession are working two jobs (or more) even if one of those jobs is full time and does come with benefits such as healthcare. No job is permanent or very stable and entire sectors of the economy seem to be in a state of constant upheaval so that the smart thing to do is to be constantly on the lookout for part-time work that can result in learning and then demonstrating the mastery of new skills. The process of a career isn’t any longer one of moving up the ladder inside a company or even in an industry, but one of aggressively adding related skills and experience because it is impossible to tell when a whole category of jobs will disappear or will demand a new set of skills.
This finally leads to the last way in which I can see that the Great Recession has changed behavior. It’s not just that jobs are less secure and job paths are less predictable—although they are—but also that the old advice on how to achieve end-of-career security seems so, well, irrelevant. Obviously, if you don’t have a job that provides healthcare or a retirement plan your future is less secure than those workers in my Dad’s generation who could count on a defined company pension and company health insurance.
But the sense of insecurity goes beyond that generational shift. Until the series of bear markets that began in 2000, many workers without defined benefit retirement plans could believe that putting money away in tax-deferred 401(k) and other defined contribution plans was reasonably likely to result in reasonable security in retirement. For many workers I think that faith has been eroded and finally shattered by the Great Recession. It’s not just that the repeated bear markets of the last decade have eroded wealth (especially when you add in the effect of the global financial crisis on the value of the family home) but that the nature of that crisis has also convinced many workers that the game is fixed. They’ve watched their own wealth decline at the same time as the Wall Street folks who bear a considerable share of the blame for the crisis have not just escaped any kind of punishment but have also seen their wealth increase.
I think one of the biggest effects of the Great Recession is a sense that the game is stacked against the average guy or gal, and that the habits of saving and regular investing that were held up as the path to financial security are a cruel sham. We’ve all had black humor conversations around the water cooler (or the office printer) that worked some riff on the joke that our retirement plan was to work until we die—or beyond if we can figure out how to work that out.
I think this marks a huge difference between the Great Depression and Great Recession. As painful as the Great Depression was it resulted in a program called Social Security that increased the financial security of the average worker. Many current workers fear that Social Security won’t be around for them.
Which wouldn’t be quite so devastating if the 401(k) and other plans that were supposed to replace the traditional defined benefit retirement plan and to supplement Social Security were actually delivering as hoped. But the Great Recession and the repeated bear markets of the last decade if they haven’t totally dashed that hope have demonstrated that getting to a financially secure retirement will be harder than it seemed at the end of the 1990s.
We know from economic history that one result of this kind of macroeconomic insecurity is that workers react by saving more. That’s only logical and it’s indeed a reasonable response to the Great Recession. Pay down debt. Don’t take on new debt. Cut spending. If you can’t count on high (or even decent) returns on your investment portfolio (and house) to get you to a comfortable retirement, then increase the amount that you save.
All sound reactions from individuals to the Great Recession. But unfortunately the aggregate effect of those sound individual reactions is to reduce consumer spending just at the point when the economies of the developed world need more growth in order to escape the deep budget holes that they’ve dug for themselves. If you’re an Italy or a Spain or a France or a Japan or a United States looking to reduce the burden of government debt, you’d really like to see more growth rather than less. That’s especially true as the developed world confronts an unprecedented aging of its population. (I’d also note that slower economic growth and a desire/need by older workers to work longer isn’t exactly good news for younger workers.) What’s needed in a situation like this are programs like Social Security during the Great Depression or the various proposals to increase spending on the social safety net now in the talking stage in China that provide increased security to make up for the increased uncertainty of the global economy. Unfortunately, I don’t see those on the table anywhere in the developed world and certainly not in the United States.
One result is that while the Great Recession won’t be as destructive as the Great Depression in the short-run, the long-term effects could be a longer lasting decline in economic growth than the Great Depression produced. (Especially if you assume, as I do, that the existence of nuclear weapons makes a replay of the something like the economic stimulus that World War II provided to the U.S. economy impossible this time around.)
And the really cheery thought is that it’s not absolutely certain that the Great Recession is really over yet.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple and McDonald’s as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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