Right about now, most businesses are trying to work out how their customers are likely to respond to the recession. Looking back to the last really nasty recession—the early 1980s—isn’t much help for low-cost airlines, cell-phone companies, Internet retailers, producers of organic and fair-trade food, and many other businesses barely imagined at the dawn of the Reagan era. The economy has simply changed too much since then for experience to be a reliable guide.
In the United Kingdom, we are blessed with tabloid newspapers to explain what’s going on. Apparently, sales of aphrodisiacs are up, and so are sales of maternity dresses: Not everything slumps downward in tough times, it seems. Elle MacPherson’s underwear is said to be doing well; so, too, is a budget store called Poundland. Some stories are frankly bizarre: The crunch is alleged to have given a fillip to sales of cake, wooden “gravestones,” musicals, and feel-good films. The quality press has not resisted the temptation to join in the guessing game: My own newspaper, the Financial Times, found evidence that physiotherapists were in demand to perk up stressed investment bankers.
All this speculation is an engaging diversion, but it tells us little. Even the more solid reports are often based on anecdotes; many are simply spin or wishful thinking. I’ve heard a food retailer muse that fair-trade-branded goods are recession-proof because once people have seen the light about the importance of fair trade, they never turn back. A travel industry expert told me that the worse things get, the more people feel in need of a vacation. Perhaps he is right. I would not bet on it.
I doubt that these early reports will tell us much about what will happen in the trough of this recession. One of the reasons people curtail their spending is that they lose their jobs, but many economists fear that unemployment is nowhere near as high as it is going to get over the next few months. There is plenty of scope for things to worsen on that score.
Economic theory tells us a little: Consumers should cut back their spending if they believe that their earning power will fall for an extended period of time, but if they believe the hard times are temporary—say, a short period out of work—then they should “smooth” by borrowing in hard times and paying back when things pick up. Because of smoothing, consumption should not shrink as much as the economy does.
That sounds reassuring, but Ray Barrell of the National Institute for Economic and Social Research, a London-based think tank, has two pieces of bad news. The first is that this is the wrong sort of recession: Because it was precipitated by a banking crisis, consumption may well fall much more dramatically. That’s plausible: Consumers who want to smooth consumption can’t borrow to do so. It is also what has happened during the 14 banking crises, in various high-income countries, that Barrell and his colleagues have studied.
The second piece of bad news relates to the first. Because consumers were already borrowing heavily in the good times, both credit constraints and a long-overdue realism are likely to bite all the more deeply. That, too, is a tendency Barrell finds in the data.
Of course, as the lucky sellers of herbal Viagra are alleged to be discovering, when consumer spending falls, some products do well and others do very badly. Nervous retailers looking for cues might wish to pick up research from the 1990s in an article by economists Martin Browning and Thomas Crossley called “Shocks, Stocks, and Socks.” They find that when people are unemployed, they save money in a logical way by not buying “small durables” such as socks and, indeed, clothes in general. In the short term, people get by and save about 15 percent of their household budget. When they find a new job, they replace the tired old socks. Bad news for Gold Toe, good news for sellers of needles and thread.