A low risk proposition

The prevailing school of thought around the post-recession consumer state of mind is the concept of a “new normal.” The phrase has a few different meanings, but at its core seems to suggest that people are going to behave more responsibly in the future than they did in the past when it comes to personal finances, spending behaviors and use of credit. (Click here to weight in on this topic and see what others are saying).

There’s no doubt the recession altered consumer behavior in two fundamental ways. People who lost jobs, had their hours reduced or their pay cut became financially strapped and forced to restrict spending. Meanwhile, those who are still employed came to suffer a psychological paralysis that inhibited their spending and made the recession worse. That’s how J. Walker Smith, president of the Yankelovitch Monitor, sees things, and he believes we have now entered a period where risk will play a greater role in consumer behavior.

“Consumers around the world have learned that risk is a factor in how they consume,” Smith said last week, speaking at the ninth annual Center for Retailing Excellence conference at the Sam M. Walton College of Business on the Fayetteville, Ark. campus of the University of Arkansas. Value and innovation matter more than ever, especially to those characterized as psychologically paralyzed, because buying the cheapest product is seen as carrying risks if the product doesn’t perform. As evidence that the cheapest price isn’t always the most important factor during recession, Smith highlighted Yankelovich research which shows quality is the last thing consumers are willing to sacrifice as the severity of their personal economic situation deteriorates. Instead, what happens is they prioritize spending, eliminating certain things so they can maintain quality in key areas. “Prioritizing is the way consumers are going to make decisions going forward,” Smith said.

If we truly are in a “new normal” economy where risk assessment is more important the implications for the economy are huge. If consumer spending drops to post World War II average of 63% of GDP from peak levels in 2007 when it spiked up to 70%, the result will be a $1 trillion reduction in spending. “What we have to figure out to achieve success is how to do business in a smaller economy,” Smith said. One way is to quit reminding consumers how bad the economic situation is and deliver a message of hope. “Optimism not only sells it can elect a president,” Smith said, referencing President Obama’s campaign theme of, “yes we can.”