Consumers, CFOs Stuck in Wait-and-see Mode

Consumers hope things are getting better, but they aren't ready to start spending.

Consumers and finance executives are stuck at the same crossroads when they think about the economy: they’re hoping for the best, but aren’t quite sure the worst is over. As a result, they continue to rein in spending — perpetuating the recession.

At The CFO Core Concerns Conference on Wednesday in Boston, Dennis Jacobe, chief economist at Gallup, told an audience of finance executives that while consumer sentiment about the economy has rebounded dramatically in recent months, consumers’ average daily spending — which fell markedly at the end of 2008 — continues to hover around its recently reduced level.

Consumers who were spending an average of $114 daily on such purchases as food, gas, and clothing in May 2008 have cut back to $63, according to Gallup’s data, gathered through telephone polling of 1,000 people a day. Among upper-income people — classified by Gallup as those who make $90,000 or more a year — the average daily spend fell by 41% between May 2008 and May 2009; among those making less than $90,000, the drop was 48%.

While the May numbers are somewhat skewed by the fact that the federal government provided stimulus checks last May to boost spending, the data for January through April also show year-over-year declines in the 20% to 30% range.

CFO

magazine’s Global Business Outlook Survey of finance executives, conducted quarterly with Duke University’s Fuqua School of Business, finds much the same sentiment among finance chiefs. More than half of CFOs surveyed this quarter were more optimistic than they were last quarter, but they still planned cuts in staffing, capital spending, and research and development, among other areas.

“Optimism is based on hope,” said Jacobe, trying to explain the seeming disconnect. “People aren’t willing to act on hope.” Instead, many say they have made permanent changes to their spending and saving habits. Twenty-seven percent of Gallup’s respondents said saving more is a “new, normal pattern,” and 32% said the same of spending less. “This is positive in economic theory,” said Jacobe, as the U.S. consumer savings rate has hit historically low levels in recent years, leaving many people without an emergency cash cushion. “But it’s not positive for the economy right now.”

Jacobe speculates that consumers will continue to be cautious about spending as long as the job market remains weak, and he does not expect much change in the second half of the year. “The new normal is where we were in the first six months of the year,” he said.

While he said most economists expect some kind of recovery later in 2009, it may be based purely on a need to replenish inventories. And many companies have significantly reduced those. After that, “things could get worse due to credit availability. There’s going to be fallout [from the credit crisis], and the question is how long can people hang on in that environment,” he said. As a result, he expects a “W-shaped” or “double-dip” recession.

For CFOs trying to plan for this uncertain future and operate in the volatile present, Jacobe recommended “building a fortress balance sheet” by fortifying cash reserves and pursuing new projects and opportunities with extreme caution. “Look to the strengths of your own company,” he said. “You can’t count on anything else. Forge a future on that.”

 

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