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taking stock

By now, it should be painfully obvious to even the most bullish of economy watchers that North American consumers have no overwhelming desire to resume their free-spending ways - even if they still retain the credit card capacity to do so. And that includes the vast numbers of once thoroughly dependable people in their comfortable middle years, whose remarkable shopping habits form the very foundation on which Western prosperity and Third World growth prospects have been built.

The changes are bound to have a profound impact on the length of the global slump, the shape of the recovery and the extent to which governments have to keep diverting unprecedented amounts of capital to prop up fragile economies.

Friday, we learned that the United States' economy did slightly better than expected in the second quarter, contracting by a mere 1 per cent annually, after a revised 6.4-per-cent annual plunge in the first three months. But this number is always subject to change, as more accurate data surface.

And those placing big recovery bets should note that nervous American consumers actually dug themselves a deeper moat, cutting spending at a 1.2-per-cent annual clip - double the drop the experts had forecast.

That number ought to be particularly sobering, considering how much cash, tax breaks and other incentives Washington has been pumping out to restart the spending engine.

As David Rosenberg, Gluskin Sheff's astute chief economy watcher, notes: Without the record government stimulation, "it is quite conceivable that consumer spending would have shrunk at a 10-per-cent annual rate."

It's not hard to find the culprits. They're currently starring in the grim reality shopping series: What Happens When Baby Boomers Stop Paying Retail. Stunned by hefty financial losses, worried about unravelling retirement nest eggs and fearful of further job losses, the vast bulk of aging consumers have slashed their spending dramatically.

In a survey conducted by the McKinsey consulting folks in March, 90 per cent of Americans said their households were spending less - more than half of them by choice, rather than need. A majority said they would stick to their cheaper ways when the economy recovered.

None of this comes as a surprise to Gordon Hendren, a Toronto-based consultant who spends his working hours closely analyzing consumer behaviour.

"One of the trends that we see is a kind of cocooning, simplifying life and spending less," says Mr. Hendren, president of Charlton Strategic Research, which, along with the Strategic Counsel, has just completed a quarterly survey of shifting consumer attitudes in both Canada and the United States.

There are differences between the two groups. Canadians are more optimistic about the nation's ability to weather the crisis and are less fearful of losing their jobs. So it follows that fewer of us (60 per cent, versus nearly 80 per cent of Americans) are consciously tightening our belts.

But there are also plenty of similarities. Both, for example, intend to reduce investments, although Americans are making the deeper cuts.

Attention financial peddlers: Dust off your most boring stuff. Forty per cent of Canadians and 39 per cent of Americans say they intend to boost their high-interest savings, while 27 per cent of Canadians and 19 per cent of Americans plan to cut mutual fund or ETF exposure.

Boomers in both countries fret about retirement income, although their investment losses differ markedly.

More than one in five Americans have suffered portfolio losses in excess of 25 per cent, while only about one in eight of their more conservative Canadian counterparts report a similarly bitter blow.

The newly frugal consumer has serious implications for marketers too.

Those overspent baby boomers used to be the most brand loyal of all shoppers. Now, they're perusing the weekly sales flyers like any other bargain hunters.

"The overarching point here is that brand loyalty is waning and comparison shopping is increasing," Mr. Hendren says.

The question for investors is whether this change is permanent. Or will people eagerly embrace their old ways once the clouds clear? And there is a sound argument that it was the profligate consumer spending that was the actual historic aberration.

"That is a question that no one really knows the answer to," Mr. Hendren says. "In the longer term, there will be some kind of loosening up. But there is no quick fix to this. I don't see what they call the hockey-stick recovery. I think it's going to be slow and painful."



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