The current recession is the blog’s fourth, after those of the mid-1970s, and early 1980’s and 1990’s. It is, however, already different from these, as it is the only one which has led to comparisons being made with the 1930’s Great Depression. As Harvard’s Prof Shiller has noted, “Depression fear did not take off” in these earlier recessions.
The leading retailers are also flagging up major change in consumer values. Last year, they suggested we are now in an “Age of Austerity“. Further evidence of this is becoming clear. Wal-Mart’s US CEO, Eduardo Castro-Wright, noted on Tuesday that a “major consumer pullback on discretionary spending was now underway”. Wal-Mart also said their “every day low cost model (now) works around the world”.
Equally, as shown by the above chart of US auto sales, something quite different is happening in durable goods markets. The current fall in sales is far worse than anything seen since records began in 1967, in terms of absolute volumes and the 6 monthly average. Clearly, if this continues, it will be very bad news for chemical demand into this important sector.
The blog worries that this trend might become permanent. We might see an L-shaped recession, whereby an aging Western/Japanese population leads to an aging global economy. The New York Times reports today, that even after Japan’s ‘Lost Decade’ ended, consumers have continued to hold back on spending, with car sales now 50% below 1990 levels.
The key issue may be one of “needs” versus “wants”. Savings are being badly hit during this recession, with stock markets down c50% in many countries, and many corporate pension schemes in trouble. In this environment, consumers will focus on absolute “needs”, such as food, housing and transport. And with most durable goods now lasting longer, they can make their money go further by cutting out the “wants”, such as new cars and new kitchens.
As the blog argued in December, CEO’s should encourage their Boards to seriously consider the potential impact of an L-shaped recession on their business. A U-shape is still the sensible Base Case. And we all hope the Upside Case of a quick V-shaped recovery may occur. But it would certainly be prudent to consider what might happen if the world now follows the example of Japan post-1990.