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Frugal habits won't go away, economists say

Two-thirds of economists surveyed say consumers' attitudes have changed for good. But there are still skeptics.

By Teresa Mears May 10, 2010 2:26PM

It’s one of the cosmic questions of our time: Will consumers stick with their frugal habits once the recession is over?

 

Yes, we will, say two-thirds of the economists interviewed by The Associated Press for its quarterly Economy Survey.

 

“I would call it a ‘mini age of austerity,’” Sean Snaith, an economics professor at the University of Central Florida, told the AP.

 

“Consumers will not run up multiple credit cards to their limits, and when buying a house the objective will not be to get the maximum square footage for which they can afford the payment. A higher savings rate will be in place for several years.”

 

Marjorie Feldman of suburban St. Louis, a retired systems analyst in her early 60s, is typical of consumers AP interviewed.

 

"I just don't feel as confident in the economy, and I never will again,” Feldman said. “I won't spend money the way I used to."

 

She cites an overall loss in wealth as part of the reason for her change of heart. The value of her investments has declined 15% in the last three years, and the value of her home has fallen 20%. “I don't think it will ever get back to where it was before,” she said.

Baby boomers like Feldman may have no choice about whether to stick with the new frugality. They have seen their net worth decline substantially just as they need money for their children’s college education or their own retirement. Add to that job losses in years when they had expected their highest earnings, and you can see why boomers are settling in for the frugal long haul.

 

But will younger shoppers stick to their frugal habits?

 

A survey of 2,000 consumers in all age ranges conducted late last year by Booz & Co. suggests they might. (You can read the .pdf file of the complete report, aimed at marketers, here.)

Almost two-thirds of those surveyed (65%) said they now

consider saving more important than spending and said they frequently use coupons. A total of 55% said they would rather get the best price than the best brand. More than half had reduced discretionary spending on such items as dining out (58%), consumer electronics (53%) and media and entertainment (51%). 

 

“Frugal behavior is now considered trendy by many shoppers and will continue for years to come,” Matt Egol, a Booz & Co. partner, said in a news release.

 

Consumer spending has risen the last five months and retail sales have risen the last three, but that doesn’t mean frugality is dead, the economists say.

 

But will it persist as the economy recovers?

 

Allie Johnson at CreditCards.com interviewed dueling forecasters.

 

Gary Shilling, president of New York-based economic consulting firm A. Gary Shilling & Co., believes consumers will stick to their penny-pinching ways.

Now, consumers really are being forced to change their views. It isn't that a husband and wife wake up one morning and say, ‘Hey, we're in way over our heads in debt. We've got to cut back.’ No, as long as they could borrow and there was something to collateralize their borrowing -- first stocks, then houses -- people continued to do so. But that's over, and with other forms of borrowing -- credit cards -- obviously a lot of people are delinquent. They're in over their heads. So they really have no choice.

David Cross, president of the California-based economic and demographic research firm Market Outlook, doesn’t think the new frugality will last.

People say it's changed them forever -- until it hasn't changed them. Until things level off, and they get a raise, and they've deprived themselves for so long -- so they go out and spend a little bit. Anytime you look at a consumer survey, you really have to position it in time and think about what kind of fear they're experiencing, what they're reading and seeing on television -- and lately it's pretty grim. It's human nature for people to feel like they're going through something extraordinary, especially for young people who have not experienced a recession. It's like the world has ended for them. I'm not saying there won't be some memory there, especially given the depth of the recession. But still, we will see recovery, and when we do, there's always an upsurge in pent-up demand.

What do you think? Have you changed your habits for good, or would you spend more money if you had it? What lasting lessons, if any, do you think people have learned from this recession?

 

Related reading:

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