By Whit Alexander, Dorian Stone, and Robert Byrne
Actions speak louder than headlines.
That is one way to interpret the results of McKinsey’s most recent survey of U.S. consumers. While the economic news has been guardedly optimistic, with corporate earnings and economic growth improving, the way Americans are actually dealing with their money betrays a decidedly more pessimistic outlook. It might as well be 2008. Or even 1981.
Completed at the end of 2010, this is McKinsey’s fourth survey of consumer attitudes since early 2009; such a longitudinal approach provides real insight into how people are reacting to the uncertain economy. Each wave of the study includes 3,000 adults who are responsible for making financial decisions in their household. Respondents are from all ages and income groups. Nine percent were under 35 and 22 percent were over 65.
All economics, in the end, is personal – the cumulative result of zillions of decisions. And it is those many transactions that are making up this rather muddled picture. Fewer than a third of those surveyed expect their personal financial situations to improve in the next six months. So it is hardly surprising that more than 60 percent of consumers are continuing to cut their spending – and no, they are not just saying so. (See chart on PDF.)
These shifts in spending patterns are leading to meaningful changes in the aggregate numbers. The personal savings rate continues to rise, and is now close to 6 percent – up from less than zero in 2006 -- and the highest in a decade. In the last quarter of 2010, a majority of consumers reduced their spending to levels last seen in early 2009. Only 18 percent disagreed with the statement: “I no longer desire to buy many of the things I used to spend money on.” More than two-thirds of people are cutting back on spending in at least one category, and these cutbacks are meant to be lasting – particularly in personal expenses and giving.
In addition, a good chunk of the money that is not being saved is not being spent on stuff, either. Instead, it is going to paying down debt. In the second quarter of 2008, net mortgage borrowing went negative for the first time since the Fed began tracking the flow of funds in 1946, and it has stayed that way for nine straight quarters.
Consumer credit shows the same trend. That kind of debt has fallen every quarter since the end of 2008; the only other time in the post-war period that happened was for a single quarter in 2002. And all indications are that that consumers will continue to lower their debt in every category – mortgages, auto, personal or education loans. For example, 7.1 percent of respondents say they will be paying down personal loans, while only 2.3 percent will be adding to their debt or taking out a new loan. A significant number say they are going to take de-leveraging much further. Fourteen percent say they are going to stop using their credit cards; three years ago, that might have seemed akin to treason. (See chart on PDF.) What all this reflects is a stubborn skepticism that the good economic news is not good enough to loosen the household budget.
While consumer sentiment improved throughout 2009, it took a hit in late 2010 as people apparently decided that the recovery is going to be a very long haul. Ten percent expected the downturn to last another five years, twice as many as in 2009, and almost half expect it to last at least another two years. The green shoots of optimism apparent in 2009 have not taken root.
What does it all add up to? Economics is, in part, a confidence game, particularly in the U.S., where more than two-thirds of GDP is generated by consumer activity. Until consumers feel confident again, the game cannot be won.
Whit Alexander is a principal in McKinsey’s Minneapolis office. Dorian Stone is a principal and Robert Byrne is an associate principal in the San Francisco office.