Hope in the aisles

As America's national economic indicators start to improve it will be the nation's shoppers, especially in bellwether cities like Columbus Ohio, who determine whether or not the recession is really over.

FT.com
Jen Moore, a young mother of two living in Columbus, Ohio, has in her kitchen cupboard 10 large cans of organic tomatoes that she bought at her local supermarket for 79 cents each instead of the usual $1.99.

"I found coupons for them and I matched them up with a store that had them on sale,” she explains with satisfaction as she sips a cup of coffee at her local Giant Eagle supermarket in Hilliard, a middle-class suburb on the city’s western outskirts. Behind her, the prominent yellow and black signs catch the mood of the moment at America’s grocery stores, advertising "new lower prices”.

Before the recession hit last year, Moore says she did not think much about the price of groceries. Now she blogs about her low price discoveries. "I used to be the kind of shopper that came into a store and would buy whatever I felt like. Now I plan my menu every single week and I know what I’m planning to buy ... I think about it a lot more.”

Her husband works as a project manager for a company that handles environmental clean-up projects – work that has been affected as state and local governments cut their budgets. She looks after her one-year-old daughter and has a son in nursery school but is starting to think about going back to work as a teacher.

"It has affected us greatly,” she says of the aftermath of September’s Wall Street crash. "There have definitely been some cutbacks in our lives.” She says she stopped watching the painful falls in the value of the couple’s retirement savings accounts, while the worth of the house they bought eight years ago has dropped too.

It may be impossible to identify a 'typical' US shopper. But Moore’s experience amid the economic crisis and how she has reacted to it have a lot of similarities with more general trends apparent in this recession. The number of families using money-off coupons has risen sharply and shoppers are opting to make several trips to different stores to search out bargains rather than do all their shopping at one convenient location.

America has always been a nation of consumers but their importance to the economy has grown. A quarter of a century ago, consumer spending accounted for 64 per cent of gross domestic product; now it represents more than 70 per cent.

That was a great thing in the boom years. Spending rose 16 per cent during the five years before the crash as cheap credit gave everyone a sugar rush. But in the third quarter of 2008 it fell by 3.5 per cent – the biggest drop since 1980 – as people watched banks fail and their investments plunge in value. It sank another 3.1 per cent in the last quarter of the year when job losses started to mount.

What will they do now the economy is growing again? As national economic indicators start to show an improvement after months of decline, it will be shoppers such as Jen Moore, in cities like Columbus, who should start to provide the first signs that US consumers are prepared to start spending again, in the belief that the recession is really over.

With a surrounding population of just over 1.7 million people, located in the middle of Ohio, of which it is the state capital, Columbus is the 15th largest city in the US. It is used to being viewed as something of an indicator, a place used by retailers and consumer companies to test store concepts and products because the demographic mix of its population is close to national norms.

The city largely missed out on the excesses of the boom, with employment growth in 2003-07 only about half the national average and house price appreciation lower too. As a result, says Bill LaFayette, economist at the Columbus Chamber of Commerce, the area has performed better than the rest of the country during the recession and "now seems to be doing much better” than the average.

Bob Wible, who manages the city’s public North Market, says his impression is the city and its business community have probably not been "doing as badly as other markets and other communities ... [but] that’s not to say that the recession hasn’t had an impact”. Total employment in Columbus, according to payroll data, has fallen from December 2007 – when America’s recession officially started – up to September this year, but by only 1.9 per cent, while jobs in the country as a whole shrank by 5.2 per cent. Retail sector employment contracted by 4.5 per cent in the metropolitan region in the same period, against a 5.6 per cent US fall.

There are small signs of the Columbus area’s comparative prosperity. In Hilliard, the store formally occupied by Circuit City, the big electrical retailer that went bankrupt last winter, has been rapidly taken over by its smaller rival, HHGregg. In Polaris, to the north of the city, a defunct Linens ’n Things store has been occupied by Big Lots, a retailer of remaindered lines, rather than standing empty.

Certainly, some still struggle. Housing foreclosures are continuing, with the county sheriff’s office listing around 250 forced sales a week. Max & Erma’s, a locally based chain of family restaurants, went into bankruptcy protection last month. This summer, the city itself was forced to seek approval from the voters for a rise in municipal income tax from 2 per cent to 2.5 per cent, to help pay for essential services, as revenues from the city’s convention centre business fell.

But LaFayette says his office is "starting to see industrial sectors showing strength in employment”, adding: "I think we in Columbus will probably turn before the US turns.”

At 8pm at the Surly Girl Saloon restaurant and bar in the city’s Short North arts district, it can look as if the city’s economy has already turned. Amid dcor that blends cowgirl chic with Mexican baroque, the crowd mixes business talk and after-work gossip over beers and a menu that includes creamed chicken over biscuits, Cajun meatloaf, and sausages and mash.

Down the street, however, last month saw the closure of Rosendales, an establishment run by an award-winning chef that served dishes such as cod glazed with saffron tea with shaved root vegetables – priced at $30 a plate, against the $US10-11 at Surly Girl. "Our higher-end restaurants are having more trouble, while the mid- to lower-end restaurants have been able to come across as recession-proof,” says John Angelo, head of the business association in Short North, a revitalised area of small outlets positioned between the city centre and the campus of Ohio State.

The pattern reflects national trends – high-end stores and restaurants that previously benefited from aspirational spending have struggled during the recession but middle-class customers have not all flocked to eat at McDonald’s, or stayed at home, but have focused on value for money. Jen Moore, for instance, is still prepared to pay more for the organic and natural products that she believes are better for her family’s health.

"The customer is not about just cheap,” Mike Duke, chief executive of Walmart, the nation’s ultimate low-cost shopping destination, said last month. "They want quality product at low prices [and are] now shopping smarter.” Mike Ullman, his counterpart at JCPenney, told the Financial Times recently: "People with the least amount of money are shopping at discount stores, that are doing the best ... The retailers that are doing the worst are the ones that are dealing with the customers with the most money ... They have money but they just don’t feel it’s the right time to be spending it.”

Over at Easton Town Centre, an open-air shopping mall that opened a decade ago, Stuart Hunter has also seen a segmented response at the bicycle store called Roll that he opened this year, the third location in the city. In spite of the inauspicious timing, he says "we’ve had great growth overall”, which he attributes in part to the "staycation” trend where more people holiday locally. "A lot of people have focused inwards, instead of externally ... as part of a whole shift in consumer values,” says Hunter, who was a branding consultant before setting up his business. Sales of bikes priced below $US1,500 have been "very strong” and customised models costing above $US4,000 are also doing well.

"People are more cost-conscious and we’ve seen a decrease in our unit sale value,” he says. "They’ve become less inclined to spend on multiple accessories and they have concentrated more of their spending on more essential items.” But both sets of customers are focused on value for money: "I think people are still very cautious and uncertain about spending.”

I t is a word that can be heard again and again in Columbus: "caution”. On the city’s predominantly African-American south side, Joseph and Debra Clark live in a small house adjacent to an area hit by foreclosures earlier on in the recession. Clark works as an organiser with the AFL-CIO union federation’s Working America campaign, while his wife is a prison officer with the state who saw colleagues lose their jobs in the budget cuts.

The couple, he says, started out by watching their spending on "going out to eat, going on vacations, as well as – I hate to say it – on what we would donate”. Now he feels more optimistic, seeing "places that have closed that are reopening, a new CVS drugstore being constructed, and lots of work being done on the roads ... so it gives me a good feeling about there being a turnaround”.

But he expects people to be more careful, particularly with credit cards that helped fuel the explosion in consumer borrowing ahead of the downturn. "We depend on plastic so much ... but now people are saying hold on, let’s check out the rates. And let’s be more cautious.”

Jen Moore has also seen signs of improvement. The family’s retirement savings account has made up some lost ground, reflecting the stock market gains. Some of the houses around her home in the Galloway area are now selling, although at prices well below pre-recession levels. "But I also know lots of friends still not finding work,” she says. So she too remains cautious, after the great collapse that challenged some of her assumptions of what her life would be like when she and her husband moved into their first home. "We thought we’d be buying something and then moving on into something larger as we had a family ... The next thing I know the house is worth $40,000 less than we paid for it,” she says ruefully.

She does not expect to go back to spending the way she did before. "Some people may go back when the economy turns up. But I think many will stay watching their spending, because of what they now know can happen – because of the fear.”

‘People know they cannot become as overextended as they were before’

The biggest economy in the world is held hostage by its shoppers – and they are bloodied, scared, and unpredictable. That leaves economists and policymakers pondering two big questions. First, are these shell-shocked people ever going to spend like they did before? Second, should they?

People usually head back to the shops after downturns to buy all the things they had been putting off when times were tough, helping the economy spring back in a cheerful V-shape. In the 2001 recession, consumer spending slowed but did not fall, and picked up again quickly. The time before that, in the early 1990s, it dipped a bit but recovered to pre-recession levels within a few quarters.

This time is different. Millions have lost their jobs and millions more fear they are next; their houses and pensions are worth nothing near what they thought; credit is scarce and expensive. "The ongoing economic recovery will be unlike any other due to changes in consumer spending preferences,” says Richard Curtin, director of the Reuters/University of Michigan consumer confidence survey.

That survey shows consumers were almost as gloomy about the economy’s long-term prospects in October as they were a year earlier – the month the world fell apart.

Unsurprisingly, given that US unemployment is nearing 10 per cent and the length of the working week is at a record low, only 12 per cent said their incomes had increased – the lowest recorded by the 60-year-old survey. For the first time in the survey’s history, the majority of families said they thought their incomes would stay the same or fall in the year ahead.

Most economists expect this pessimism – along with depressed incomes and tight credit – to keep spending anaemic next year. Indeed, spending fell again in September after four months of gains.

That summer rise came at the cost of reducing savings rates from 4.9 per cent in the second quarter to 3.3 per cent in the following three months. Ultimately, policymakers see lower savings as a bad thing. They want to reduce the economy’s reliance on consumption by promoting what President Barack Obama calls a "post-bubble growth model” based in part on exports and manufacturing.

"One of the ... key understandings coming out of this past financial crisis is that a lot of our growth was debt-driven – credit cards being maxed out, home equity loans being taken out to finance a lot of purchases,” Obama said this week at a meeting of his Economic Recovery Advisory Board.

"Consumers I think wisely recognised that they can’t get that overextended any more.” Or as Paul Volcker, the former Federal Reserve chairman who heads the advisory board, bluntly put it: "We cannot have so much consumption.”

Additional reporting by Sarah O’Connor

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