Secular vs. Cyclical

In the financial markets, analysts generally distinguish between secular and cyclical trends. The former refer to powerful, long-term directional moves, while the latter represent shorter-term swings around the primary trend.

Arguably, one of the reasons why some observers have remained upbeat in their outlooks for the U.S. economy is because they believe that even if things are headed south in the short run, we are only likely to experience a cyclical downturn, lasting for a year or less, similar to the recessions we have seen over the past few decades.

What they're failing to take account of, however, are the many extraordinary financial imbalances, including high personal debt loads and a near-record low savings rate, and the attitude changes that appear to be sweeping across the land as the current decline unfolds.

It's one thing to say that Americans will cut back on consumption and boost savings, such as deferring graduate school loans on a social work masters degree or canceling Netflix, until conditions become more favorable. It's quite another, as the following report, "Spending Habits: Americans at All Income Levels Tighten Their Belts," from the Christian Science Monitor's Marilyn Gardner suggests, that growing numbers are rethinking spending habits, lifestyles, and spiritual needs.

As a recession looms, signs of a new frugality emerge. Say goodbye to long trips and lattes.

Until recently Shannon Palmer, like many Americans, spent money freely. She assembled a nice wardrobe, took four vacations a year, and ate out often. But now, as she listens to economists discuss the likelihood of a recession, she recognizes the need to get her own finances in order.

"I'm young and I feel mostly secure in my job, but I have a good deal of debt on my back," says Ms. Palmer, a publicist in Andover, Mass. As a step toward fiscal responsibility, she has begun a "very aggressive" plan to pay off student loans, a car loan, and credit-card bills. She has also started to save.

"This is a time for action when it comes to people taking responsibility for their personal finances," she says. "This is just the motivation I needed. It's forced me to look at things differently."

Looking at things differently is a theme running through conversations of Americans at all income levels these days as they review their spending habits. Nearly 2 out of 3 consumers intend to reduce indulgent spending in 2008, according to a new survey by HSBC Bank USA. Four out of 5 want to increase the amount they save.

"Even at the top layers of luxury, there has been some softening in spending," says Milton Pedraza, CEO of The Luxury Institute in New York. That includes yachts, jets, cars, and additional homes.

Among those who do not dwell in that economic stratosphere, the new prudence is often a necessity, stemming from uncertainty about jobs, high fuel costs, heating bills, and the price of healthcare. For others, like Palmer, it is voluntary and represents, at least in part, a shifting of values. They regard an economic downturn as an opportunity to reassess their priorities.

"It's a good wake-up call for a lot of people, that the good times don't last forever," says Kim Danger, founder of Mommysavers.com. "People realize they don't need an expensive lifestyle to focus on the things that really matter."

Palmer's wake-up call began when she tracked her expenses and made a sobering discovery. "I spent a lot of money on very pointless, unneeded things," she says. That included $3 every two days in a vending machine at work, regular visits to Starbucks, and social lunches.

To cut back, she has drastically reduced what she spends on clothes. She is learning to do her own dry cleaning. She has also canceled an annual trip to Florida and another to the West Coast.

"I didn't want to sacrifice my comfort, but I wanted to cut back on the luxuries," Palmer says. "It feels really good to finally have sanity when it comes to my finances. I don't have to constantly be worried about going overboard."

This new fiscal awareness has also spread to her friends. "We have started to discuss economic things," Palmer says. "It's definitely more of the social conversation than it ever was before."

Living beyond one's means is hardly a new issue. "Americans have been dealing with debt for a long time," says Ronald Wilcox, author of the forthcoming book "Whatever Happened to Thrift? – Why Americans Don't Save and What to Do About It." "Some of the Founding Fathers were famously in debt, like Jefferson."

Americans' innate optimism adds to the challenge. "One consequence of being overly optimistic is that people think tomorrow is probably going to be better than today," Mr. Wilcox says. "So they don't save."

It took a layoff five years ago to teach Christine Pietryla the importance of saving. "I wasn't prepared and I went into panic mode," she says. "It was definitely a defining moment. I had not been very prudent. It was a smack in the face, but it was a lovely smack in the face because it ended up setting me on the right path." She now runs her own public relations consulting business, Pietryla Enterprises, in Chicago.

These days Ms. Pietryla is taking another look at her finances. Rather than feeling deprived as she trims expenses, she feels more free. "I'm trying to approach it as a lifestyle change, as opposed to a sacrifice," she says.

In addition to cutting back on Netflix, iTunes, and a daily latte, she buys only what is on her grocery list, avoiding impulse purchases. By consolidating her cellphone and home phone carriers, she was able to negotiate a better price. "I'm also very careful about bank charges and late fees," Pietryla says, noting that last year they cost her $140. "I'm getting rid of that." She is keeping her workouts with a personal trainer. When she goes out with friends, they often do things that don't require a lot of money.

Michael Boss, a manager at MPC Computers in Boise, Idaho, regards this kind of revision as essential.

"I don't want to see people out of work or unable to make their mortgage or rent payments, but I do think that collectively we need to recoil from the materialism that has come to define this culture," he says. "Spiritually and environmentally, there are all these reasons we should do more with less and not feel as though not having all these material things is an abrogation of our birthright as Americans."

He and his wife have cut back to one car. "I drop her off at her office and then go to work," Mr. Boss says. "We scaled down the size of our home after our children left. We've reduced our mortgage."

Although they could afford a 40-inch television, that's not a priority. "We don't feel that we have to have every new gadget or gizmo. We just don't move in circles where you're out of the loop if you don't have the right toys."

That's the attitude Bob Glantz takes toward cars. He saves money by buying used vehicles that have been checked over by a mechanic. "The most expensive fragrance in the world is not Chanel No. 5 or Opium or White Diamonds, it's that new car smell," says Mr. Glantz, research director at Access Communications in Berkeley, Calif.

Three layoffs during three recessions – in 1981, 1987, and 1991 – taught Glantz the importance of putting money aside when paychecks are coming in. He advocates maximum payments to a 401(k), if possible.

He charges everything he can to an airline miles credit card and earns free flights. "My wife and I have taken a couple cross-country trips," he says.

They also enjoy inviting neighbors over to play cards and Scrabble. "You can have very good times at home for very little money," he says. Emphasizing that they do not have a "sackcloth, ashes, and gruel" lifestyle, he adds, "You can do things to be frugal without hardship."

Stacy Francis, president of Francis Financial in New York, finds that many of her clients are "digging a little more deeply in their soul," asking whether their spending really reflects their values.

"For most people, where they're spending their money has little or no correlation to what's really important to them," she says. "They're really surprised at the amount they're spending on things that don't really matter, that don't add to their happiness."

To help people achieve financial security, Ms. Francis suggests a five-step plan:

First, conduct a full analysis of where you're spending your money. Second, list what your real values are. What is important in life to you? Third, look at whether your spending reflects your values. Fourth, change your spending to bring it in line with your goal of achieving financial security. Fifth, evaluate your finances every six months to be sure you are on track.

In general after a recession, patterns of spending and saving vary widely by age and stage of life.

"When things get better, those in an older generation are more likely to continue to be prudent, because they know it can be lost in a minute," says Alice Simon, professor of economics at Ohio Wesleyan University. "Those in a younger generation are more likely in good times to continue to spend. They've never really had to suffer."

Even so, when the good times roll again, Palmer hopes to maintain her financial goals. Pietryla expresses similar determination.

"I just feel better," she says. "My stress level is less intense. I'm focusing on that shift in values. I'm prepared if anything happens. It's the best sleep I've ever had."

Comments

[Jes]

"Nearly 2 out of 3 consumers intend to reduce indulgent spending .... Four out of 5 want to increase the amount they save." .....
I'm not sure this is in any way different than the situation several years ago, except perhaps there's more angst now. Intending and wanting aren't doing.

[kenmeer livermaile]

Shared this link at a forum the other day.

Response:

him: KL, thanks for the link. I doubt the cutback on consumerism will last, though, I have the suspicion it's just a shock reaction.

me: Kinda depends on consumer spending ability. My brain is fading fast today, so I'll just note that the ridiculous extension of credit, into a position of the economic foundation of America's economy, was brought to a close in coincidence with the demand for fossil fuels significantly exceeding supply, creating the rapacious inflation bubble of petroleum futures; and that bubble in turn was collapsed by the collapse of the credit bubbles.

I see a synchronized deflation: the price of 'money' (Fed Reserve prime lending rate) has been shrinking since around the turn of the millennium (fun to say that in such recent retrospect, if scary too). The cost of most consumer goods has been shrinking relative to income for some time too, I think. Then the true fundament of our economy -- oil -- skyrocketed due to genuine demand, although (not speculation pressures, although those piggybacked the genuine demand increase), the credit structure collapsed on the drag (rapidly rising food and raw materials based on increased energy costs) this placed on our credit-bubble economy, collapsing credit-based values rapidly impacted demand for oil, oil prices collapse, and now everywhere I look I see mostly deflation.

Meanwhile, we're borrowing money like crazy to reinflate the credit bubble.

I don't see a basis for any prolonged return to consumer gluttony until a new energy platform is achieved. Instead, I see gradual descent into consumer pauperism.

I would love to have authoritative knowledge of the financial credit underpinnings of the current agricorps. Imagine them defaulting. My scanty understanding of How Things Work suggest to me that the first result would be food cost deflation (coupled with lowering energy costs' lowering of food production costs', this effect could be pronounced).

Normally, this couldn't be possible, but obesity has been a growing problem in the USA, yes? Bellies shrink along with economies. Rice and beans over burger'n'fries.

So much for brevity. The swig of codeine cough syrup I just took turned my brain ON.