Will U.S. Consumers Really Embrace Frugality? Fat Chance

(MoneyWatch)  The bad news on U.S. consumer spending just keeps getting worse. Retail sales fell again in March, and in a historic development, consumer prices fell from year to year for the first time since 1955 -- perhaps heralding the onset of actual deflation. (Some economists -- as well as me and my MoneyWatch colleague Charles Wallace -- have recently been more concerned about the possibility of inflation, although further out in the future.)

Amid all this gloom, some pundits have started to ask whether this downturn will lead modern Americans to embrace the sort of frugality long associated with the Great Depression itself. For instance, the Financial Times recently surveyed a range of experts -- from the worlds of investing, marketing research, and consumer goods -- who all posited that even once the economy is back on track, values such as thoughtfulness and thrift will govern spending, replacing our old impulses of aspirational shopping and conspicuous consumption.

Yeah, sure. Do they really believe a rough year or two could break the spirit of the American shopper? For a reality check, I got hold of a couple of the studies myself -- some of which make better arguments than others. Euro RSCG, a firm of brand consultants in downtown Manhattan, sees opportunities in "a world in which there are no 'second class citizens' -- inclusive, pragmatic, and genuinely simple," and a "new sense of respect and decorum in which humility, and trustworthiness are valued above extravagance... [e]mulating the Greatest Generation, while looking to the future." (The Euro RSCG study is not online.)

At Citigroup Global Wealth Management, chief investment strategist Edward Kerschner -- best known for his prescient call of the 1987 stock market crash -- writes (emphasis in the original):

Following a period when conspicuous consumption was both socially acceptable and economically feasible, consumer behavior is likely to become more "conscious," spurring a trend toward ethical consumption.... 'Thrifty times' [are] the most likely [long-term] scenario in the West.

Kerschner's report (unfortunately not online) is thorough, but the problem is in his premise: he projects onto US consumers behavior from the Japanese "lost decade" of the 1990s. American consumers have gone through many recessions, including the doozy of 1981, without learning any lessons of thrift or moderation. Personal consumption expenditure flattens out a little in hard times, but seldom falls very far. (Click the chart at right for a larger version.)

The idea of Americans changing their spending reminds me of our brief shift to more fuel-efficient cars in the 1980s, which of course was followed quickly by our love affair with SUVs in the 1990s. Or the vow of a friend of mine who, after enjoying himself too much on an out-of-town business trip, made a wrong turn in his hotel room, heard the door slam, and came to in the glare of the hallway - buck naked, of course. "I am never going to drink again," he told me slowly, "and this time I mean it."

Even if a new frugality didn't seem so unlikely, it would almost certainly be terrible news for the economy, since consumer spending accounts for roughly 70 percent of the entire U.S. GDP.

Another shopping authority, AlixPartners, does the math for us. "Americans say that even post-recession, their spending levels will be -- and remain -- 14 percent lower than pre-recession levels," says chief executive Fred Crawford. (The 14 percent would go into savings.) "That would translate into a 10 percent drop in GDP," he predicts, adding: "Even if that 14 percent is inflated by the emotions of the day, which we think it probably is, [we believe] Americans' attitudes towards risk, savings and spending truly have been dramatically reset, to the point that the future may look more like the early 1980s than the mid-2000s."

For the record, US consumers actually did save between 10 and 12 percent of income in the early 1980s -- but over the following 25 years, steadily ran the savings rate down to zero.