Consumers Cut Back Further on Credit

Despite a rise in the Consumer Confidence index over the last several months, consumer borrowing in the United States fell a record $21.6 billion in July from the previous month (NY Times, September 8, 2009). This was the largest decrease in borrowing since 1943 despite the oversold and highly popular Cash-for-Clunkers program which began in July. The cutbacks which affected all areas of consumer borrowing – revolving and non-revolving (not including mortgages) – significantly exceeded analysts predictions of $4 billion. With this drop, the annual pace of change has gone from -4.2% in May to -7.4% in June to -10.4% in July.

Like businesses, families across America are continuing to get their personal balance sheets in order. Less and smarter debt means more security and personal freedom. Families want to feel confident that they can continue to stay in their homes and put food on the table. For the majority, this requires they spend within their means, reduce debt and finally begin to save. Wherever and whenever possible, families are making do with what they have. Credit cards and bank lines of credit which in the past were rationalized to take that family vacation or buy a new car because “we deserve it” are now seen as emergency funds for when things get worse.

For businesses which thrive on consumer spending this suggests a much slower albeit more sustainable recovery. As a result unemployment in the US will likely continue to drift higher over the next six months before it peaks suggesting a slow and perhaps erratic rate of decline over the next several years. In this environment, consumers will only buy when they feel they have to or when they see tremendous value. Businesses which desire to succeed in this market must determine:

• Where globally there exists demand which they can satisfy
• Which businesses and brands are thriving in this economy and more importantly why
• How they can deliver more value to consumers at a better price

Conventional methods and sacred cows must give way to new thinking. Companies must begin asking themselves provoking questions such as:

• Are there competitors who should also be our partners?
• Can we source or license our products instead of manufacturing them?
• Should we reinvent ourselves?

It is clear that consumers' buying habits have changed and their appetite for debt has decreased
dramatically, permanently changing the economic landscape. With it, businesses which desire to thrive must also make dramatic and permanent changes in the way they operate.

Pete Canalichio