A year after the credit crunch – Will things change forever?
Have we bottomed out? It certainly does seem that the worst is behind us and things are starting to look better. Many people are asking this question, and are asking what will happen when the economy will start to grow again. Will we go back to our old habits? Will consumers load up their credit cards like they did before? Or will they work harder to save money?
To understand what may happen in the future, we can learn from trends of the past. If you take a look at significant events in history, you can’t but help notice a certain pattern. The pattern is as follows:
Prosperity → Sudden shock → short term adjustment → Structural change → Slow but Permanent change
I bet you would think it’s a sweet deal if a gallon of gas cost $1. I bet you would tell all your friends about it, even consider ways to store some. At one point in history, one buck a gallon was expensive, expensive enough to send the global market into a tail spin. Take for example the 1973 gas prices. Before the gas crisis hit, cars where getting bigger and bigger. The size of the engine mattered, and the larger the better. “By 1971, the standard engine in a Chevrolet Caprice was a 400-cubic inch (6.5 liter) V8, and Motor Trend’s 1972 road test of the similar Chevrolet Impala logged no more than 15 miles per gallon” (According to Wikipedia.com)…. Imagine driving that kind of car at $5.00 a gallon in 2008. Back then, no one asked about the environment, gas consumption or cost. Then the crisis hit (if you can imagine, gas went from a national average of 38.5 cents in May 1973 to 55.1 cents in June 1974) and if you were even able to get gas, you would have thought twice about your next summer road trip.
Several short term adjustments kicked in: Cars with odd number license plates would be allowed to fill up on odd number days, priority to transportation and commercial vehicles was given. Green, yellow and red systems became common place, and many other programs. Along with these short term solutions came big structural changes, even though at the time they where positioned as temporary, they remain with us to this day. For example, the 55 mph speed limit came into effect. Yes, the speed limit has nothing to do with your safety; it has to do with saving gas. Fall back/spring forward. You recognize these words right? Day light savings time was born in an effort to save oil reserves and it is still with us to this day. And a long list of other programs that we take for granted today came about because of this crisis. What no one noticed along the way was the permanent change in consumer behavior. In the mid 70’s many ridiculed those people driving “those unsafe unreliable Japanese cars.” You drive a Toyota? What is that? Does it break every day? Is it safe to drive on the highway next to the giant rigs? I would never drive that? No way!!! But while the skeptics went on and on, the tide changed, and since then the Big Three has seen a decline year over year in sales. It did not matter if Honda looked unsafe. It did not matter if Toyota was not reliable. The sentiment has changed and the Japanese recognized this and improved their product over time. An encore in 2008 of high gas prices, and the fate of GM and Chrysler was sealed. Sure the decline took a while, but if you stepped out of the trees, you would have seen it happen. The change continues and the next generation of cars, be it the Prius and other hybrids, or the VOLT, all can attribute their success to an event that happened 36 years ago. Don’t laugh at your neighbor’s SmartCar, you maybe driving one in 10 years.
Look back at all the major crises in history: World War I and II, the burning of the Hintonberg, Chernobyl, etc… all follow the same pattern. Many of the short term solutions placed after these events stay with us to this day. Don’t forget that the Great Depression and the crash of the stock market in 1929, gave us social security, a program that if it did not exist today would have caused the 2008 credit crunch to become a catastrophe.
This month marks one-year since the financial meltdown and we are already seeing patterns of this trend towards change. The credit crunch came as a result of government, corporations, and individuals spending beyond their means. For years everyone faked the good life and borrowed credit to a point where the system could no longer handle it. Mortgage crisis, credit crisis, stock market crash, double digit unemployment, etc.
Many short term reactions are still taking place, cash for clunkers is just one example. Government, business, and individuals are making small changes to cope, but there are also structural changes taking place. Some are legislative such as the Truth in Lending Act (credit card bill of rights), others are in consumers’ sentiments. Savings is finally on the rise, credit card issuance and use is on the decline as both issuers are reducing the number of cards in the market and consumers are turning away from credit cards. American Express is paying (some) people to close their cards, and recent data shows consumer have reduced their use of credit cards by 50%.
There is no question the economy will rebound and there is no question that consumers will open up their wallets again and spend. The question is, how will they spend, with cash or credit?
Time will tell, but if history is a guide, the consumer embrace of cash is here to stay and the cash lifestyle will become permanent for many shoppers.
If you look at the overall economy, eCommerce revenue is insignificant in the overall scheme of things. Compared to GDP, eCommerce is a rounding error. On the other hand, eCommerce is extremely effected by what is taking place in the market, especially because of its heavy reliance on credit. The question becomes, are eCommerce retailers adjusted to this new reality? Are their eCommere and gift card sites ready to service customers with cash come Feb 2010 when the credit card bill comes in place? Will there be the equivalent of Toyota and Chrysler in the eCommerce industry?
