The Evolution of the American Consumer

In our consumer driven economy,  consumers may be avoiding the very thing that is crucial to recovery from the recent economic meltdown. The irony could not be greater – in a time when the economy needs their money the most, people are curbing their discretionary spending and possibly prolonging the pain.

The economic crisis is sure to be credited for major changes in the system. The days of unregulated capitalism and risky Wall St business are certainly behind us. What though, has the American consumer learned, and where will they go from here?

“Go shopping.” Who could forget President George Bush’s odd words of advice to the public after 9/11? Although he was ridiculed for saying it, the man had a point. Fast forward seven years, two  elections, and an economic crisis, and those two simple words still ring true.

Recent behavior suggests that Americans might have gotten a long needed wake up call in regards to their spending habits. Decades of spending have given way to an uprise in savings and a new mentality about pulling out that credit card. One not need look farther than the latest issue of Time to get the picture : frugality  is suddenly hip.

70 % of our economy is consumer driven. A recent Gallup poll shows that consumer mood is improving, but spending tells a different story. After an incredibly weak holiday shopping season, consumers began spending more in January and February. However, the increase is minute, and it merely shows stabilization.Actual growth is what economists are concerned with.

With unemployment rates at record levels, it is no wonder people are reluctant to spend. However, the collective “hoarding” of money, while rational for an individual, can lead to serious problems on a larger scale.

A great example is the case of the auto industry. The decline in car sales caused a ripple effect that threatened to wipe out the entire industry.

Duke University professor Dan Ariely, in a recent interview with NPR, characterized this dynamic as a social coordination game between consumer and economy. He argues that, because of the way people react, recessions are mostly psychological.

The savings rate in the United States had been flat for decades until the recent economic crisis, largely because of the spending and credit culture that dominated American households.

Recently, it has climbed to 5%. Considering that it has actually, in the past, been at 0%, this is a significant increase.And it continues to rise.

Experts also warn against saving too much .Simply put, a dollar saved is a dollar not spent. Without money circulating through the system, economic recovery is inevitably slow.

Below is a look at the dynamic between  Americans’ saving and spending habits :

For the first time in 15 years, credit card debt has also recently shrunk.This is an indication that people are tying to rid themselves of debt, or scaling back  their purchases. The credit card debt in 2008 reached a staggering amount of $951 Billion

It is no secret that Americans have been spending heavily and  charging their purchases for  years.After all, these habits prompted TIME magazine to list American consumers on their list of “who’s to blame” for the economic crisis.

The United States is the world’s largest debtor nation. Below is an alarming chart comparing debt to GDP:

Recent efforts to cut back, save, and get out of debt are surely healthy habits.

So, in a climate where excess is out, and moderation is in, what is the future of the American consumer?

Have Americans learned a lesson, albeit one that can potentially slow the conomic recovery?