Despite considerable reductions in the price of gasoline, American consumers are spending far less than market analysts predicted.

The consumer today is faced with concomitant consequences of existing outstanding debt. Unsure of the value of their home relative to their mortgage, and having used that value at its height to fund lines of credit, consumers are suddenly retrenching from previous spending habits.

As any economist would presume, spending at the high end is the first to be cut back.

This will also equate to a dramatic regression in new business startups and investments. Our markets are likely to see a significant waning of day traders and those who invested in small amounts. This is likely to leave more institutional traders in the market and proliferate volatility in the markets for some time, conceivably years. 

For companies selling products or services, this creates a new paradigm. How to inspire confidence in consumers to buy their products or services?

With underlying diminution in trust the foundation of deficiency of consumer confidence, advertising may do more harm than good if not administered with exceptional forethought.

Coping with the new paradigm shift, many traditional methods of marketing will fail to produce historic results. Retailers and producers alike should anticipate that consumers will continue to contract high-end spending for at least two years.

The new paradigm is telling consumers “it’s cool to be frugal”. Evidence of this is to be found in new consumer spending figures. However, the root causation of such spending shrinkage cannot be focused on one particular factor. Many are predicating this drop in spending. Among these causes we find job loss and job insecurity; devaluation of real property; market guidance to save rather than spend; fear of bankruptcy; a desire to reduce outstanding debt; loss of confidence in the banking sector and fear of investment opportunities.

The contemporaneous consequence of spending retraction will include continued devaluation of assets such as inventories. Manufacturers and retailers will find it difficult to move existing inventory forcing them to require far less. This in turn will cause reductions in manufacturing production and retail sales forces, equating to job losses.

What is the one good thing in this paradigm? We will import less and spend less on unimportant items we’ve traditionally imported. This will result in a greater balancing of trade.

America needs to build its manufacturing base again, and produce more, using more people to do it. We need to establish programs that create work, build small to mid-sized businesses and concentrate more government spending on capital improvement projects.

We are concerned that war spending will be cut and not replaced with other spending that creates domestic jobs. Taking only one-third of our annual war spending and putting it into domestic capital improvement projects would result in the creation of millions of new jobs.

Concurrently, we express concern that confidence in the banking sector remains low. To secure that industry, as we’ve repeatedly said, systems must be put in place to ensure that banks make better, safer loans. That will ensure the confidence in depositors, borrowers and investors. It is now critical to pass legislation to put a checks and balances system in place for mortgages and business loans, as well as auto loans.

The systems we recommend will quickly rebuild the core confidences lost in the past years, with the consequence of rebuilding consumer confidence and spending.