According to a well respected value investor named Ron Muhlenkamp, the biggest change in US Economics has been a measurable -5% step function on discretionary spending. In the sixth month period since the economic collapse last October, the public has lowered its spending significantly and most of this come in the form of discretionary purchases.
What does this mean in everyday language? It means that consumer habits have changed. And they have changed most dramatically when it comes to spending on things people realize they can give up. According to Muhlenkamp, the clearest change in discretionary spending has been in vacation and travel:
People may have taken a step down in vacations. They may have stepped down a level in restaurants, or in shopping. In fact, a lot of us had to mark down our expectations. Walmart recently reported that year-over-year sales are up 5 percent. I suspect that sales at Tiffany’s are a little less than that; (year-over-year, sales are down 20 percent).The point is the mix has changed.
A lot of people have taken a step down, but most of us have marked down our spending in ways that my grandparents would have called discretionary. It’s in ways that most of the world would call discretionary.
While overall spending is down only 5 percent, the effect that this has on particular industries is quite severe.
Joe Prato, a real estate professional with the company SeaWinds of Sea Isle who has been tracking the Jersey Shore vacation rental market for over a decade, reports that this is the first year in a very long time where the economy is taking a real, measurable toll on the rental industry. According to Prato, “2009 rentals are down over 30% from last year and everyone is negotiating rental prices and length of stays.” In other words, the 5% drop in overall consumer spending has resulted in an approximately 30% drop for this particular industry. That’s a blow to the gut.
This is an important observation. While home sales have been declining now for the last 3-4 years, the vacation rental market actually didn’t get hit until this year. Why? For starters, the housing market started its decline simply because of a drop in demand (everyone had taken advantage of low mortgage rates and made the purchases they were going to make). Further, unlike the housing market, the vacation rental market depends on wide-scale discretionary spending. It depends on the public feeling like they’ve got a few grand to spend enjoying a week at the beach. If they don’t feel confident that they can afford to spend that money, they don’t… because it’s something they are willing to sacrifice when times are tough.
What this shows is the emergence of a new way of thinking among American consumers. A more careful, thoughtful, discerning type of spending. It’s a step or two down from the exuberance we exhibited over the last two decades.
The question that remains to be answered is whether this mindset is the new norm, from which new habits form, or just a temporary setback for a growth based economy.
