Right now, consumers and the economy are on the brink‹ ready to head up or down, depending upon a few key signals. So how can you know which way it will go? There are few signs that point the way and let us know the rules for the new road ahead. First and foremost on the positive side, consumer confidence is up. In December, The Conference Board announced that its Consumer Confidence Index rose 8.8 points to 93.7 (1985 = 100), from 84.9 in November. This ended six straight months of declines, including precipitous decreases since September. Further, the December increase represented the biggest single month jump in four years. Moreover, consumers were even more hopeful about the outlook down the road. Those expecting an improvement in business conditions in six months increased from 17.7% to 22.2%.
Significantly, rising consumer confidence appears to be a trend. In January, the University of Michigan's consumer sentiment index rose to 94.2, after a rise to 88.8 in December. This handily beat analysts' expectations of an increase to 90.0. Consumers' more positive outlook has been no doubt fueled by our nation's military successes in Afghanistan, combined with more optimistic reports about the economy. While Americans are aware that there's a long road ahead, the early military battles have succeeded more quickly than anyone imagined back in September. Companies are not cutting jobs at the rates they had been. Thus, consumers, while cautious, are not in a complete "lock down."
On that note, consumers did get out and shop during the holiday season. Sure, they were lured by proactive and extremely generous discounts. But shoppers did not do what many had feared: just sit home, completely fearful of going to the mall or opening their wallets. And while retail sales in stores open at least one year increased only modestly, up 2.3% according to Goldman Sachs, some stores did especially well. Wal-Mart, Target and Kohl's all posted strong gains. This is not surprising since these stores fit consumers' moods and pocketbooks right now: they save them time and money by offering value, style/quality and a convenient shopping experience.
Looking beyond just retailers and holiday shopping indicators, there are positive signs, at least as compared to past recessions. Inventories are far lower than usual. In past recessions, retailers and others usually had very high levels of inventory to sell off before gearing up production full force. Now, because of better technology to monitor what's in stock and lessons learned in past recessions, both manufacturers and retailers have lower levels of inventory. In fact, The New York Times reported back in December that many retailers and manufacturers made the decision that it was better to face spot shortages than to exacerbate post-holiday markdowns. All of this means that retailers and manufacturers will be able to gear up production and purchases that much sooner as we pull out of the slump. In fact, there are some reports that factory orders are already increasing. Some economists are predicting that the economy will turn around as early as midyear. But that doesn't mean an immediate a boom. There are still signs of trouble.
Consumers are more or less "spent out" following record setting acquisitiveness during the late 1990's boom. Not only did we buy just about everything we could possibly ever want or need, we did so on credit. Therefore, not only are we lacking demand, we are lacking cash. And in past recessions, consumer spending is the engine that has driven the recovery. So look for some fits and starts as the economy starts to pick up.
Further, consumer confidence, while rising, is not rock solid. Even if layoffs have slowed, they still continue at companies large and small. When a company like Ford announces elimination of tens of thousand of jobs, it shakes everyone, not just those directly affected. And given the recent Enron debacle, which came just as investors had dusted themselves off after the tech stock collapse and September 11th, investor confidence may remain low. Since sluggish financial markets make it hard for companies to raise capital, growth will be slowed even more.
Meanwhile, even seemingly successful formulas may not be adequate. Kmart offered value pricing, but it was not enough to keep it out of bankruptcy: Wal-Mart outflanked it on one end by offering the same, or even lower prices, within a far more efficient operation. At the same time, Target trumped Kmart with its now legendary fashion-forward approach. When all retailers are begging for business, consumers can ask for and get all that they want: low prices, solid quality and style to boot. The same goes for business-to-business customers as well. This squeezes margins all around. Thus everyone in the supply chain is looking for the best deal, while seeking products, services and systems that can boost performance and give them a competitive edge.
Which leads us to the key point here. In uncertain times, consumers and customers will look to those who can fill multiple needs simultaneously, who can give "more bang for the buck." On the consumer end, it may be style and price, for example. On the B-to-B end, customers for various transaction systems will be looking to those vendors who will offer fair pricing, sure. Reliability, ease-of-use, processing time, that the customer can turn to a competitive advantage and higher margins. Tough to do, for sure. But your customers aren't asking any more of you than their customers are asking of them.