Monday, November 24, 2014

State of the American Consumer: Caution remains, but signs point toward improvement

A majority of American consumers remain uncertain about the economy and cautious in their spending habits, based on the results of a new NRA survey.  On the positive side, the survey suggests that this recession mindset is not a permanent state for consumers, and they will continue to come out of their shell as their personal finances improve, according to the NRA’s chief economist Bruce Grindy. His Economist’s Notebook commentary and analysis appears regularly on and Restaurant TrendMapper.

Although the official trough of the Great Recession was more than five years ago, many American consumers have yet to climb out of the rut, according to a new survey* commissioned by the National Restaurant Association.  When asked earlier this month to rate the current state of their own personal finances, a majority of adults described them as either fair (36 percent) or poor (18 percent). Less than one in 10 adults say their personal finances are in excellent condition.

Flash back to 2010 when the economy was just beginning to add back some of the nearly 9 million jobs that were lost during the recession, and the responses to the same question were almost identical. Nearly six in 10 adults said their personal finances were in fair (41 percent) or poor (18 percent) condition, while only seven percent described them as excellent. 
With the personal economies of many consumers trending sideways, it’s not surprising that this persistent recession mindset is negatively impacting spending. Consumer spending, which generally helps propel the economy out of a recession, has been lackluster during the current recovery. 

In the 21 quarters since the official end of the recession, total personal consumption expenditures rose just 11.8 percent in inflation-adjusted terms, according to the Bureau of Economic Analysis. During the same period following the previous three recessions, consumer spending increased by an average of 21.8 percent. 

Post-recession spending has been even more sluggish for the Services category, which includes many discretionary sectors like restaurants. Real spending on services rose just 8.5 percent during the last 21 quarters, or less than half of the average 19.6 percent gain that followed the previous three downturns. 

Even now, a solid majority of American consumers remain reticent to spend. When asked to describe their personal spending behavior right now, seven in 10 adults say they are holding back on spending in some fashion. 

Twenty-seven percent of adults say they “are very concerned about the economy and are holding back significantly on spending,” while 42 percent say they “are taking the wait and see approach and are holding back somewhat on spending until the economy improves.” Only three in 10 adults (29 percent) say they “are confident in their financial situation and are not holding back on spending.”

While it’s not surprising that lower income households are more likely to be curtailing spending right now, it is somewhat unexpected that a majority of higher income households are also cutting back. Among individuals in households with income of $100,000 more, one in five say they are holding back significantly on spending, while 35 percent are holding back somewhat. 
Financial Worries Persist
Underlying consumers’ cautious behavior is the fact that they are spending a lot of time worrying about financial issues. Survey respondents were given a list of seven items relating to their finances, and were asked how often they personally worry about each one: very often, somewhat often, from time to time, or almost never. 

Overall, consumers are most likely to regularly worry about their overall household financial situation (43 percent say they worry very or somewhat often), being able to save enough for retirement (42 percent), keeping up with their bills (42 percent), and the availability of jobs in their community (38 percent).

While the concern about saving for retirement is elevated among all age groups (including one in five adults age 65 or older), it is the most top of mind for middle-aged consumers. Fifty-eight percent of adults aged 35-to-44 and 50 percent of adults aged 45-to-54 say they worry very or somewhat often about being able to save enough for retirement. 

Twenty-eight percent of adults say they worry very or somewhat often about keeping up with their mortgage or rent payments, while one in five consumers have similar concerns about accumulating credit card debt.

Not surprisingly, Millennials are much more likely to have concerns about their student loans, with 30 percent of all individuals aged 18-to-34 saying they worry about them very or somewhat often. However, this figure also includes individuals who don’t have student loans.  Looking specifically at 18-to-34-year-olds who have student loans, 55 percent say they worry about them very or somewhat often. 
Looking across all seven of the financial issues, three in four adults said they worry about at least one of them very or somewhat often, while 57 percent said they worry about at least two of these issues on a regular basis. 

Millennials are the most likely to worry about multiple financial issues on a regular basis. Sixty-six percent of adults between the ages of 18 and 34 say they worry about at least two of these issues very or somewhat often, versus only 39 percent of adults aged 65 or older. 

Signs of Optimism
Searching for green shoots shouldn’t even be part of the conversation at a point when the recovery is more than five years and 10 million jobs along, but such was the impact that the Great Recession had on the psyche of the American consumer.  With many consumers seemingly stuck in a recession mindset, the sources of optimism have often been difficult to uncover. 

Although consumers’ assessment of their personal economy remains mixed, they are relatively optimistic that conditions will improve in the year ahead. Thirty-four percent of adults say they think their household financial situation will be better in 2015 than it was in 2014, while only 8 percent expect things will get worse.

Millennials are the most optimistic about an improvement in their finances next year. Forty-nine percent of adults between the ages of 18 and 34 say they expect their household financial situation to be better in 2015, while just 5 percent think it will be worse next year. 
While an improving financial situation will enhance consumers’ general ability to spend, the survey results also suggest that restaurants will likely be the beneficiaries of some of this increased spending.

When asked about their current restaurant usage, a significant proportion of the American public say they would like to be patronizing restaurants more often. Thirty-eight percent of all adults say they are not eating on the premises of restaurants as frequently as they would like, while 41 percent say they are not purchasing takeout or delivery as often as they would like. 

This indicator of pent-up demand is elevated across all age groups, with at least one-third of adults in each category saying they aren’t using restaurants as often as they would like.

Unfulfilled demand is even somewhat elevated among individuals from higher-income households. More than one in five individuals in households with annual incomes of $75,000 to $99,999 and 19 percent of those with annual incomes of $100,000 or more say they are not patronizing restaurants as often as they would like. These households are prime restaurant customers, accounting for roughly 54 percent of total restaurant spending in 2013.

Among consumers who described their personal financial situation as either fair or poor, more than half say they aren’t using restaurants as often as they would like. In addition, roughly one-half of adults who have cut back significantly on spending say they would like to be using restaurants more frequently. 

Putting these results in a historical context, this measure of pent-up demand remains well above pre-recession levels. On a consistent basis during the stronger restaurant business environment of the mid-2000s, typically only one-quarter of adults said they were not patronizing restaurants as frequently as they would like. 
Overall, these survey results suggest that consumers’ appetite for restaurants remains unfulfilled, and they will be primed to burn off their accumulated pent-up demand for restaurants when they are more confident in their personal financial situation.

Despite consumers’ cautious outlook and their curtailed spending behavior, the restaurant industry has held up relatively well overall.  While the average restaurant usage of many American consumers may be down somewhat from pre-recession levels, there are roughly 14 million more of them in the pool of potential customers than there were in 2007.  As a result, total restaurant industry sales continue to trend upward, albeit at moderate pace. 

It’s clear that American consumers haven’t abandoned restaurants, but rather are choosing their visits more carefully until their financial situation improves.  Given the positive underlying economic fundamentals as well as elevated levels of pent-up demand among consumers, the stage is set for an improving business environment for restaurants in 2015.

*The survey results are based on a nationally-representative telephone survey of 1,012 adults conducted October 31 – November 3, 2014 for the National Restaurant Association by ORC International.

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