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2010 forecast: Consumers will save before spending

As the economy recovers, expect a new consumer to emerge, one who is value-conscious, savings-minded and wary of debt.

That was Gina Martin Adams' forecast of consumer attitudes Nov. 10 at the National Marine Bankers Association Annual Conference in Hilton Head, S.C. The Wells Fargo Securities economist said these are American consumers not seen since the 1940s. "You will lose those consumers in 2010 and 2011 if you think they are the same consumers that you sold to from 2003 to 2007," she said.

Americans' loss of net worth in the financial crisis was double that of the 2000-01 recession. "We've never seen housing prices fall like they have [since 2007]," she said. In metro areas, they have dropped from 20 to more than 50 percent.

Meanwhile, consumers are trying to pay off the debt they amassed during the 2003-07 bubble. They are trimming $10 billion a year off credit-card debt alone.

Americans were spending 19 percent of their disposable income to service debt in 2008; they are spending about 18 percent now; they need to get that down to 17 percent to stabilize their finances, she said. Adams says consumers are likely to remain focused on reducing debt rather than increasing it for a while.

Going forward, they likely will spend at a third of the rate they did in 2007, Adams said. She told the bankers they can expect consumer spending to grow a wimpy 1 percent in 2010, 1.5 percent in 2011. And after 20 years of Gross Domestic Groduct (GDP) growing at an average 3.3 percent, the nation likely will see 2 percent growth in 2010, 2.2 percent in 2011, she predicted.

Americans are becoming savers again, which - along with reducing debt - really isn't a bad thing, she said. Americans' saving rate was 12 percent of income in 1982. That had fallen to 1 percent in 2006. Today it's about 4 percent. She said that figure could go as high as 7 percent as consumers try to recapture net worth.

U.S. consumer spending is driven by income, credit, wealth and sentiment (confidence). Income, credit and wealth are all in significantly negative territory, and consumer confidence still has not recovered from record low levels.

With unemployment high and gasoline prices projected to rise to $3 a gallon, "The consumer is telling us they're not feeling great about their overall situation," she said. "The four legs of the table still are not where we want to see them."

Consumers are going to be thrifty in 2010. "They are going to spend more of their income on core items than on discretionary items," she said.

From 2008 to 2009, spending on discretionary items was down from 45 to 40 percent of income; expenditures on core items were up from 55 to 60 percent.

On the up side, though unemployment is at 10.2 percent and unemployment including underutilized workers is 17.5 percent, during the Great Depression more than 25 percent of workers were unemployed. Eighty percent of workers are employed today, and their incomes are going to go up about 1 percent next year.

"The consumer is showing some signs of life," she said. That's the good news. The caveat: "...We've seen no real growth in sales yet."

— Jim Flannery



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