Demand Macroeconomics \'It\'s an Ill

DEMAND

macroeconomics 'It's an ill wind that blows no one good' -- sustained or increased demand during an economic downturn. Who is unaffected by or benefits from an economic recession?

'It's an ill wind that blows no one good' -- sustained or increased demand during an economic downturn. Who is unaffected by or benefits from an economic recession?

According to the standard, textbook economic definition of a recession, overall macroeconomic demand will decrease as individuals lose jobs. Inventories will grow as a result and production will decline in response. Eventually, prices go down as firms engage in bidding wars, and consumers begin to buy again (Haltiwanger et al. 1991, p.89). However, as the current recession demonstrates, the effects of a contraction upon specific niche demographics of the market are far more complex. Also, spending patterns have not recovered uniformly as the American economy begins to lurch in fits and starts, back to a state of economic health.

The very wealthy have begun to buy again but not because prices have gone down: demand for luxury goods is by definition driven by high prices, rather than curtailed and the rich are less price sensitive than the middle class or the poor. The average American consumer has not recovered his or her confidence, given the precarious state of the economic recovery. Indicators suggest that that the initial contraction of the rich's consumption habits after the fall of Lehman Brothers was due more to image concerns rather than real economic distress. Furthermore, some industries benefitted during the most severe period of the 2007-2009 economic downturn.

A recession is usually defined as two consecutive quarters of economic contraction, although this definition has been in dispute amongst economists as overly rigid. After evaluating the economic conditions that resulted after the failure of the housing market and liquidity crisis, most economists now date the recession back to December 2007, despite the failure of the economy to be in a state of official contraction (Sparrow 2009). Initially, it was predicted that the consumption patterns of everyone would change seismically as a result of the economic contraction across all industries, and all consumers would curtail their spending habits. But was this really the case?

In the case of the very wealthy, the answer is: yes, for a short period of time initially spending did decrease. Demand for luxury goods favored by the wealthy declined swiftly in the wake of the credit crisis and the failure of Lehman Brothers. Brands such as Cartier and Montblanc saw their sales decline in the final quarter of 2008, more quickly than at any other point in their history. Their Swiss owners of these brands "reported turnover of 1.55 billion Euros for the third quarter of its 2008 to 2009 financial year, a decline of 12% compared to a year earlier at constant exchange rate" (AFP, 2009). Many of the ultra-wealthy made cutbacks in their purchases, often symbolically, as soon as Lehman Brothers began to unravel: "The day after Lehman Brothers went down, a high-end Manhattan department store reportedly had the biggest day of returns in its history. 'Because the wives didn't want the husbands to get the credit-card bills,'" but not because a few hundred or even thousand dollars would make a great difference to the financial status of these individual's households (Shnayerson 2009, p.1). The reactions of these Wall Street families were fearful in nature, as they panicked, or they felt motivated by a desire to show that they appreciated the downturn the country was experiencing.

Thus perception of not wanting to be a 'big spender' was responsible for the swift, initial and ultimately short-lived contraction in the demand for luxury goods more than actual damage done to the market. Quickly, the market rebounded, especially brand names favored by the wealthy. Hermes began farming crocodiles in Australia once again to keep its infamous Birkin bag in stock, which costs £4,000. Customers complained that the waiting list for the bag, for which demand is kept artificially high through rationing, was just as long as ever (Wood 2009). A desire to seem thrifty was counterbalanced with a desire to be seen holding the status symbol, and hopes were dashed that the Birkin would be easier to get in the wake of the failure of some Wall Street investment firms.

Many bankers and their families initially cut back "not out of necessity" but "from collective guilt and fear" that quickly dissipated (Shnayerson 2009, p.1). Some cut back "the fitness trainer from three times a week to once a week; the haircut and highlights every eight weeks instead of every five" but these cutbacks were quickly reinstated (Shnayerson 2009, p.1). The Internet provided a tool for consumers wishing to shop for luxury in a private manner. Exclusive boutique previews of designer collections shifted online: "The concept seems tailored to recessionary times. Any guilt that consumers feel over spending thousands of dollars on unnecessary items can be replaced by bragging rights" and there is no need to appear in public buying such items, even though the items can be 'shared' between friends of similar affluent means (Wortham & Miller 2009). Internet companies devoted to such online luxury showcases benefited from the recession.

High-end fashion created new 'looks' to suit the recession's need for chic. According to the high-end British brand Mulberry's CEO, luxury brands were still selling, had shifted to more "understated designs" as ?"over-the-top extravagant ?consumption just isn't in favor right now" (Wood 2009). Brand names of luxury goods were more apt to be concealed in their design, now, but those 'in the know' still understood how much the items cost. And like all luxury goods, the high cost of such brands is part of the brand's desirability for the target consumer.

The Hiscox Wealth Review of 2009 found while 24% of individuals who identified as wealthy said that they "have not been directly affected by the recession but feel they need to behave differently anyway…because they know people that are struggling financially" (PRN Newswire, 2009). Over a quarter (28%) said they were less conspicuous in their consumption as a result of the recession, even though the economy had officially 'recovered' in economic terms. But this reduction of conspicuous consumption was not necessarily rooted in need. An Upper East Side woman who often bought a pair of Manolo Blahniks for $600 or $700 pair of shoes as "retail therapy" at the store said while she was at the high-priced New York restaurant Michael's, she admitted she was "thinking, Oh, Manolos & #8230; But then I thought, Why? Why do that? It just doesn't feel good" although she could afford the shoes (Shnayerson 2009, p.1). The conventional economic definition of a luxury good is one whose artificially high price encourages consumption in its target demographic -- thus, for a time, this principle was undercut -- but only for a few months.

Said one woman, when she was at the supermarket immediately after the fall of Lehman: "The well-dressed wife of a Wall Street guy was standing behind me. She asked me how to get one [a shopper's card]. Then she said, 'Have you ever used coupons?' I said, 'Sure, maybe not lately, but sure.' She said, 'It's all the rage now -- where do you get them?'" The woman said she was not concerned about saving dollars and cents, but merely wished to participate in the 'coupon chic' of the moment (Shnayerson 2009, p.1). As the jobless rate begins to stagnate (although it is still just as hard for the currently employed to find work) the cache of 'coupon chic' has abated; now the recession has officially ended (Rugaber 2009).

The global economy overall, it should be noted, buoyed many sectors of the luxury market even during the initial contraction. Asia, particularly China, rebounded quickly compared with Europe and America -- it was a Chinese company that bought GM's Hummer brand, which General Motors was forced to sell off as a contingent requirement of receiving aid from the federal government. For the first time, Chinese will buy more cars this year than Americans. Demand is so high that drivers put their names on long waiting lists for the most popular models," including gas-guzzling SUVs (Bradsher 2009). "Yacht maker Oyster Marine has seen an increase demand for its 5 million Euro yachts, saying that buyers needed to merely recover their emotional confidence after shock waves such as the collapse of Lehman Brothers…the grim industry prediction of a 50% fall in orders has not materialized although the company now has an export bias" (Wood 2009). "And many wealthy investors began to shift their wealth overseas, to withstand the economic downturn, and have prospered as a result -- which gives them more money to buy luxury goods. "Most U.S. growth in the last year or so has been generated by exports' (Wolf 2009, p.36).

When the wealthy were cutting back, it was a crisis of confidence and concerns about image perception rather than actual financial worries, and now they still continue to buy high-end goods when they do make purchases. Thus it was confidence ebbed that had ebbed actual income. The Hiscox Wealth Review of 2009 found: "The recession has left its mark on the psyche of the Working Wealthy with a lack of confidence impacting their perceptions of wealth and appetite for risk. Whilst two in five (41%) say the recession has not had an impact on the amount of money they have to spend, almost an equal number (44%) say they are fearful of the future" (PRN Newswire, 2009). But, observed Vanity Fair reporter tartly: "Most 60-year-old ex-Lehman Brothers bankers likely squirreled away enough to at least scrape by on a couple of million a year" (Shnayerson 2009, p.3). If they did cut back, it was in relatively minor ways: "Why should I pay $250,000 for a private plane," said one man to the magazine "when I can pay $20,000 to fly commercial first class" (Shnayerson 2009, p.1).

Some industries are even helped by recessionary periods -- some service industries such as tailors and cobblers are doing a booming business, as people are repairing items they once used to carelessly discard. Discount retailers, are doing well as consumers shift their purchasing patterns from traditional stores to lower-end venues. Consumers that used to buy at Macy's, are now buying at Wal-Mart, while consumers who bought at Barney's and Manolo Blahnik's stores are still able to buy at such establishments, if only slightly fewer purchases. But even the middle class do not discard all luxuries during recessions. Sadly, another industry that prospers during a recession is that of the 'sin' industries. "In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash" (Beattie 2009).