Clothes, Cars -- and Homes?

Improving Consumer
Sentiment Buoys
"Medium Ticket" Items

American consumers are finally coming out of hiding.

After months of penny-pinching amid the recession, new figures —showing an improving job market, rising factory output and increased retail sales — suggest that consumers are no longer restricting their budgets to necessities like food and medicine. They are starting to buy clothes, jewelry and even cars again.

--"Upbeat Signs Revive Consumers’ Mood for Spending"; The New York Times (4/7/2010)

If necessities like food and medicine are at the bottom of the consumer "food chain," and discretionary items like clothing and jewelry are in the middle, what's at the top?

Big ticket, "capital" items like cars and homes -- purchases that depend not just on consumers' current financial condition, but their confidence about the future.

Keep an eye on that "trickle up" effect (see, "Trickle Down" Economics to "Bubble Up?").

Big -- and Little -- Ticket Purchases

Recession, Uncertainty Hammer Big-Ticket Purchases

What to know what's selling today? Not big-ticket items.

On a scale of 1-10 (1 is the lowest, 10 is the highest), here is a shorthand -- mine -- for the magnitude of various consumer (and business) purchase decisions. Just like the Richter scale, this scale is logarithmic, kind of (8.0 is a much bigger purchase than 6.0).

Anything ranked over 3.0 has seen a dramatic slowdown; anything over 6.0 has fallen off a cliff.

A. Consumers

Basic Necessities; "Sundries" (toothpaste, gallon of milk, candy bar): 1.0
First-run movie: 1.5
Nice Restaurant: 2.0
Tank of gas: 2.0
Clothes: 2.0 - 3.0
Appliances: 3.0 -4.0
Furniture: 3.0-5.0
Used car: 4.0-6.0
New car : 5.0 - 7.0
House: 10.0

B. Business

Capital equipment (commercial plane, agricultural combine, bulldozer): 10+
Publicly traded company (buyout): 10+++

To my armchair economist's eye, big-ticket purchases have been killed by: 1) economic uncertainty, including job (in)security; 2) financial pressure (and in some cases, hardship), caused by falling housing and stock prices, and rising unemployment; and 3) concern about falling asset prices.

Interestingly, any one of these can chill demand for houses: even people who are relatively flush and feeling confident about the future logically may hesitate to step up and buy if they're convinced housing prices have further to fall. That psychology explains why markets tend to overshoot (a phenomenon also associated with stocks): to coax people out of their defensiveness at market lows, bargains often have to become screaming bargains.

Of course, the companion to wanting to buy is being able to.

Fortunately, the federal government is increasingly focused on steps designed to address that. Those include: a fat tax credit to first-time home Buyers; very cheap mortgage money; and lots of fresh capital ploughed into Fannie Mae and Freddie Mac (which should then "irrigate" the housing market with added liquidity).

Will these steps work? Stay tuned. . .