Consumer demand isn't coming back. Not anytime soon. Not for a decade or more. Not anything like the levels of 2006 or 2007, before the global economic crisis hit full force.
I know that's not the conventional wisdom right now.
You've heard the current version of history over and over. Consumers got ahead of themselves in the past few years and spent money that they didn't have by running up balances on their credit cards and treating their houses as ATMs.
The consensus opinion on Wall Street, in Washington, D.C., and on Main Street is that it will take some time, maybe as long as two years, to work off the excesses of the past couple of years. And then consumer demand will return to something like the level of the years before the global economic crisis. Consumers may not go back to spending like it's 2007, but they will spend like it's 2006 or 2005 or . . .
Frankly, I don't think anyone is terribly convinced by that story. It's just that the alternative is too grim to contemplate. Most folks in the financial-advice industry and most politicians in Washington would rather go whistling past the graveyard and hope nothing bites them.
But I think there's a good chance this story and this reading of history are wrong.
I think there's an alternative history of the global consumer that makes waiting for demand to come back to "normal" absolutely wrong. It's at least as likely -- more so, I think, but you decide after you've read my arguments -- as the mush that clogs the political and economic discourse of the moment.
Demand: Gone but not forgotten
The result of investing in anticipation of demand coming back to pre-crisis levels would be absolutely painful if it's wrong. Stop worrying about whether the current downturn will become a full-scale correction of 10% or worse. We've been through that. We know -- sort of -- how to deal with it.But if global consumer demand isn't set to bounce back, then we as investors face a huge challenge. And we'd better face up to it and formulate some strategies for coping with it, even if it's not a certainty.
I'm increasingly convinced that the behavior of global consumers in general, and of U.S. consumers in particular, over the past 20 years was an aberration. And that what we're seeing now isn't the beginning of a gradual recovery to the spending levels of the years before the global economic crisis but a return to the long-term spending (and saving) trend that stretches back to 1945.
If that's the case, the global economy is indeed awash in excess manufacturing and service capacity because companies and industries had projected future consumer demand by drawing trend lines from consumer behavior over the past couple of decades. They then built factories and service networks to meet that projected demand.
The global economy isn't going back to that trend line. Over the next decade or more, industry after industry isn't going to gracefully absorb that temporary extra capacity. Instead, the global economy is in for a decade or more of tooth-and-claw fights for market share, bloody consolidation as industries are forced to radically shrink capacity, and an increasing number of the walking dead that are kept alive only by large infusions of capital from national governments.
This isn't the first time recently that I've said this.
I've referred to this scenario in a number of recent blog posts, including one in which I even suggested a couple of ways to cope with this scenario as an investor. But a recent piece from global consulting company McKinsey fleshes out some of the details of this alternative history. (You can find the article at McKinsey's online journal, the McKinsey Quarterly.)
Like many other consultants these days, McKinsey has been busy asking consumers about their spending plans. In March 2009, for example, 90% of the U.S. households McKinsey surveyed said they had reduced their spending because of the recession. About 33% of respondents said they'd reduced spending significantly. Roughly 45% of those who had reduced spending did so because of necessity. More than half of those who said they had reduced spending said they planned to keep their spending down after the recession.
Consumers are not only spending less; they're also borrowing less and saving more. In the quarter ending in June 2008, net consumer mortgage borrowing turned negative for the first time since 1946. In March 2009, the personal savings rate reached 5.7% of disposable income, a 14-year high. That still lags the post-1945 average of 9%.
Continued: Different, sure, but how?
