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The New Psychology of the American Consumer

12/07/11

 

December 7, 2011

American Consumers Newsletter
by Cheryl Russell, 
Editorial Director, New Strategist Publications
 


IN THIS ISSUE:

1. Hot Trends: THE NEW PSYCHOLOGY OF THE AMERICAN CONSUMER
2. 
Q & A:  HOW MANY ARE POOR? 
3. 
Cool Links:  
NEW MOBILITY NUMBERS, POVERTY BY COUNTY, 2010 BIRTHS
4. NEW Reference Tools: AMERICAN INCOMES, HOUSEHOLD SPENDING, BEST CUSTOMERS, 14 ALL-NEW WHO'S
 BUYING REPORTS

To see Cheryl Russell's Demo Memo blog, click here.

  
1. Hot Trends  

The New Psychology  

of the American Consumer

 

Millions of Americans are worried, anxious about their finances, and with good reason. The percentage of Americans who are economically insecure is at a record high, according to the latest Economic Security Index report released last week by researchers at Yale University. The economically insecure are defined as people in households whose disposable income (take home pay minus medical expenses and debt payments) fell by at least 25 percent in the past year and who do not have enough savings to make up the difference. The percentage of Americans who are economically insecure has been rising for years, from 14.3 percent in 1986 (the first year measured) to today's 20.5 percent. The insecure now number 62 million. 

 

Being surrounded by insecure friends and neighbors makes the rest of us pretty edgy. And that brings us to the new psychology of the American consumer: save money and pay off debt. Designed to soothe fears and improve function, the new mindset is an about-face from the spend and borrow ways of the past few decades--a now outdated way of thinking on which many businesses still depend to their peril. A New Strategist analysis of 2007-2009 trends in discretionary income and spending reveals the grip of the penny-pincher psychology and explains why so many businesses are struggling.  

 

The average American household had $13,179 in discretionary income in 2009. That might sound like a lot of "fun" money, but do the math and it amounts to only $36 a day for everything from movie tickets to dog food, vacations, and sit-down restaurants. Discretionary income is the money that remains for spending (or saving or reducing debt) after a household has paid all the necessary costs of living a middle-class lifestyle. Many businesses depend on discretionary dollars for sales and profits.     

 

The $13,179 in discretionary income available to the average household in 2009 was 2 percent less than in 2007, after adjusting for inflation. The decline is not surprising. What is surprising is that the decline was not greater or more widespread. In fact, many households saw their discretionary income rise between 2007 and 2009. The households with growing discretionary incomes include those headed by people aged 25 to 44, households with incomes between $40,000 and $150,000, blacks and Hispanics, households in the Midwest, and householders with no more than a high school degree. How could discretionary income increase for these typically struggling households in the midst of the Great Recession?  

 

The households that have more discretionary income are the ones that cut their spending on necessities the most. 

 

To understand why discretionary income increased for some households requires familiarity with two terms: disposable income or take-home pay, and nondiscretionary--or necessary--spending. Disposable income is the income households bring home after taxes and mandatory payroll deductions for retirement plans. Disposable income fell pretty much across the board between 2007 and 2009, after adjusting for inflation. But--and this is the important point--many households cut their spending on necessities even more than their incomes fell. The households that succeeded in cutting their necessary spending the most were the ones that saw their discretionary income rise, since discretionary income is what's left over after subtracting necessary spending from disposable income.

 

Let's look at some examples. Households headed by 35-to-44-year-olds cut their annual spending on necessities by $2,696 between 2007 and 2009, after adjusting for inflation. This cut was far greater than the $1,657 decline in their disposable income during those years. Consequently, their discretionary income grew by $1,038 to $16,811. Black households cut their spending on necessities by $1,708, while their disposable income fell by a smaller $1,004, so their discretionary income grew by $705 to $7,726. Midwestern households cut their necessary spending by $2,151 while their disposable income fell by a smaller $1,175, so their discretionary income grew by $976 to $12,916.  

 

How did these households succeed in cutting their spending on necessities so sharply? One of the most important factors was the decline in homeownership. The homeownership rate of 35-to-44-year-olds, for example, fell from 68 to 65 percent between 2007 and 2009. Consequently, the age group managed to cut its annual spending on housing by 4 percent during those years, after adjusting for inflation. Most of the households that experienced an increase in discretionary income between 2007 and 2009 saw their homeownership rate fall. By becoming or remaining renters rather than homeowners, they succeeded in cutting their spending on the single biggest item in the household budget--housing.

 

An increase in discretionary income is not necessarily good news for businesses that sell discretionary items. Just because some households had more discretionary income in 2009 than in 2007 does not mean they spent those extra dollars. That's the point: they did not spend the money. Regardless of the demographics, most households slashed their discretionary spending and their necessary spending between 2007 and 2009, after adjusting for inflation. Householders aged 35 to 44, for example, cut their discretionary spending by 8 percent during those years--a $982 cut. Households in the Midwest cut their discretionary spending by $978. Black households cut their discretionary spending by $299. Many households are using their "fun" money to pay down debt, which explains why the economic recovery is no fun at all. 

 

For the complete story on the 2010 incomes of American households, men, and women, and 2007-09 trends in discretionary income and spending, see the all-new American Incomes: Demographics of Who Has Money, available from New Strategist in print or as a PDF download with links to Excel spreadsheets for each data table. Please send questions or comments to Cheryl Russell at demographics@newstrategist.com

BET YOU DIDN'T KNOW

Married couples in which both husband and wife work full-time had a median household income of $103,704 in 2010. 
   
2. Q & A

 

How Many Are Poor?     

 

It depends on how you define "poverty." The way poverty is officially defined in the United States has not changed since the methodology was developed in the early 1960s. At that time, the average household devoted one-third of its budget to food. The poverty threshold was set at three times the food spending required for a minimum diet and has remained unchanged since then except for annual cost-of-living adjustments.

 

The world has changed, however. The average household devotes a much smaller share of its budget to food and much more to housing, transportation, health care, and child care. But the poverty population is still officially defined by cash income alone, although many of the poor now receive food stamps, housing subsidies, tax credits, and other benefits.

For years the National Academy of Sciences, the Census Bureau, and the Bureau of Labor Statistics have been working to create an updated measure of poverty. Now they have succeeded, and it is called the Supplemental Poverty Measure (SPM). Because defining poverty is fraught with political drama, however, the SPM is not now and for the foreseeable future will not be the official poverty measure. Instead, it will be "an additional macroeconomic statistic providing further understanding of economic conditions and trends," according to the Census Bureau.

 

How much does the modernized measure change the count of the poor? Actually, not much--which is somewhat reassuring. The percentage of people in poverty in 2010 climbs from the official 15.2 percent to a slightly higher 16.0 percent. The number of poor climbs from 46.6 million to 49.1 million. The 2010 poverty threshold for a four-person family with two adults and two children increases from $22,113 to $24,343.

 

Less reassuring, however, is the enormous increase in the number of Americans who are almost poor based on SPM methodology--with incomes between 100 and 150 percent of poverty level. That number was revealed a few weeks ago thanks to the efforts of the New York Times, which asked the Census Bureau to run a special tabulation to determine the number of near poor under the SPM criteria. The Timespublished the stunning results in a front page article (see Older, Suburban, and Struggling, 'Near Poor' Startle the Census), and the Census Bureau released a tabulation of the findings (see Special Tabulation of Supplemental Poverty Measure Estimates).

 

The number of near poor--people with incomes between 100 and 150 percent of the poverty level--jumps from the official 29 million (before benefits are added and costs deducted) to the SPM-adjusted figure of 51 million--a 76 percent increase. Even worse, as the Times reports, adding this number to the SPM estimate of 49 million people below poverty level, means that nearly one in three Americans is either in poverty or only a car breakdown or medical emergency away from being poor.

 

By Cheryl Russell, editorial director, New Strategist Publications. Questions or comments, please contact

demographics@newstrategist.com  

 

BET YOU DIDN'T KNOW

The average household spent $1,276 on travel in 2009--15 percent less than in 2006 (the peak spending year), after adjusting for inflation.  

Source: Best Customers: Demographics of Consumer Demand
     

 3. Cool Research Links

 

To keep up-to-date on ever-changing demographics and lifestyles, check out these useful links.  

 

Mobility Rate Update  

The Great Recession has paralyzed a once footloose nation. You can find out how stuck we are at this Census Bureau site. Between March 2010 and March 2011, only 11.6 percent of Americans aged 1 or older moved. The mobility rate of homeowners fell to a record low of 4.7 percent, and renter mobility also fell to an all-time low of 26.2 percent. Because the homeowner mobility rate has fallen more than the renter mobility rate over the past few years, renters are a larger share of movers now than they have been at any time in the two decades in which the Census Bureau has been collecting mobility data by homeownership status.   

 

 

Poverty, County by County

For those who want small area income and poverty statistics, the Census Bureau has released county and school district data for 2010, available at this site. Also available here are tables that rank counties by their poverty rate and by their median household income. The highest poverty rate is in Ziebach County, South Dakota. More than half (50.1 percent) of its 2,817 residents are poor. Most of Ziebach county lies in the Cheyenne River Indian Reservation. Falls Church City, Virginia, has the lowest poverty rate. Only 3.1 percent of its 12,520 residents are poor. The independent city lies within the Washington, DC, metropolitan area.    

 

Births: Preliminary Data for 2010    
If you want confirmation of the ongoing baby bust, then visit the National Center for Health Statistics' birth data site to get the latest statistics. In 2010, the number of births fell to 4,000,279--7 percent below the all-time high of 4,316,233 in 2007. So far, this baby bust is much smaller than the one that brought us Generation X. Between 1957 (the peak year of the baby boom) and 1973 (the low point of the baby bust), the number of births fell 27 percent. Perhaps the most striking finding in the report is the sharp drop in the birth rate of young women. The rate among women aged 20 to 24 fell 6 percent between 2009 and 2010--to 90 births per 1,000 women, the lowest level ever recorded for the age group. 

 

BET YOU DIDN'T KNOW

The average household spent $49,067 in 2009, 5 percent less than in 2006 (the year household spending peaked), after adjusting for inflation.
 
      
4. Meet Your Customers   

 

Who buys? What do they buy? How much do they spend?

Get the dollar-for-dollar answers you need to succeed in today's tough economy from these one-stop resources

 

The annual spending data in Household Spending: Who Spends How Much on What, the first edition of which was published in 1991, allow you to compare and contrast spending by a host of demographic characteristics so you can determine market potential and the dollar size of each market, identify your best customers, and understand which segments account for the largest share of spending. New to the 16th edition are intriguing results of how the nation's spending habits have changed because of the Great Recession, with comparisons of spending trends between 2000-06 and 2006-09.

 

American Incomes: Demographics of Who Has Money has the 2010 income data you need to stay competitive in an unpredictable economy. It is a one-stop resource for understanding the economic status of Americans--how the incomes of men and women are changing, which households have money left over after paying for necessities (valuable discretionary income figures calculated just for this book), who is wealthy, and who is poor. New to the 8th edition are detailed estimates that show trends in discretionary income and spending. And the chapter on wealth shows the effects of the Great Recession on household assets and debt.

 

In the new 8th edition of Best Customers: Demographics of Consumer Demand, experts and novices alike can see at a glance who spends the most and who controls the largest market share--often surprisingly different--on over 300 products and services organized into 21 chapters that focus on entertainment, groceries, transportation etc.--everything a consumer might buy. Based on unpublished data--you can't find this on the Internet--from the Bureau of Labor Statistics' invaluable Consumer Expenditure Survey, Best Customers brings you insight into household spending by householder age, income, household type, race and Hispanic origin of householder, region of residence, and educational attainment.

 

The 14 volumes in the new Who's Buying Series, which can be purchased individually or as a set, gives you the big picture about consumer spending by age, income, household type, race and Hispanic origin of householder, region of residence, and education. Each volume focuses on an individual product category, ranging from apparel and beverages to restaurants, consumer electronics, and travel. To round out the spending picture, you also get who-are-the-best-customers analyses of the data. New to these editions are valuable detailed comparisons of spending before (2000-06) and after (2006-09) the Great Recession.


For your convenience, all of New Strategist's titles are available as searchable single- and multiple-user pdfs linked to spreadsheets of each data table so you can do your own analyses and create PowerPoint presentations.

BET YOU DIDN'T KNOW

Households with incomes of $150,000 or more spent 9 percent less in 2009 than in 2006 (the year spending peaked), after adjusting for inflation. 

Source: Who's Buying: Executive Summary of Household Spending       


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