Americans Rediscover Thrift

The theme that kept popping up in our missives over the past five days was US consumer spending – or rather, the lack thereof. Though the imminent recovery of our economy is being touted far and wide, Americans have begun squirreling away funds…just in case the sky is, in fact, falling.

Americans are spending less on ‘luxuries.’ They have decided last season’s shoes are good enough for this summer, and that they don’t need those designer jeans. In fact, it was reported on Friday that Saks Fifth Avenue is cutting orders by 20 percent after posting losses in each of the last four quarters.

Americans, Bloomberg reports, “are shutting their wallets and building their nest eggs at the fastest pace in 14 years.”

And it’s not just retail taking a hit. Restaurants are hurting as well, as Bill points out in the DR Highlight of the week, below…

America’s middle class has rediscovered thrift.

There are a number of sit-down restaurant chains that cater to the middle class – Applebee’s…Chili’s…Ruby Tuesday and a few others. They expanded greatly during the ’90s and ’00s in order to meet the desires of the big spending masses. But now that the masses aren’t so free and easy with their money, The New York Times reports that they are in desperate competition for remaining diners. This competition is manifesting itself as price deflation.

Applebee’s offers dinner for two for only $20. Chili’s advertises entrees for just $7. Ruby Tuesday’s is going for a 2-for-1 deal. Buy one meal, get one free. All of them are making heavy use of discount coupons.

Oversupply is producing deflation. Prices are falling as suppliers fight for demand by offering more for less. And over at the Red Roof…the roof has already caved in as the chain has defaulted on its mortgage debt.

This is what you’d expect at the end of a long period of credit expansion. EZ credit brought forth too much demand and too much supply. Now, the demand is disappearing…and the suppliers struggle to hold on.

Even now, we’re facing an economy in which 70% of our economic output depends on consumer buying. No buyers, no recovery.

This is natural, normal and perhaps necessary to a market economy. And it will take years to sort out. Roofs have to fall in on thousands of enterprises, speculators and households. Then, the rebuilding can begin.

But the Bernanke Fed is not about to let nature take her course. The Fed is on the road to ruin…and it’s not about to “exit” yet. Deflation is still enemy number one. Don’t expect any tightening from the Fed anytime soon, dear reader…it is far too soon for that.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

And lastly, as Bill told us, in the Highlight of the Week, above, U.S. restaurant chains that had flourished in the last ten to 15 years are now struggling to make ends meet. It is a trend that will most likely continue, as more and more Americans go back to basics.

Here in Baltimore, in fact, there is an overwhelming move toward supporting local farmers, or even growing your own produce. This is not just a local trend. Across the country, people are reducing money spent on going out to eat and are embracing their cooked-at-home meals and dinner parties.

It’s the ‘rediscovery of thrift’, as Bill puts it. And Dan Amoss believes that this is a trend to pay attention to, because these restaurants that grew so rapidly during the bubble years will have a hard time adapting in the post bubble world.

Best regards,

Kate Incontrera
The Daily Reckoning