Schizophrenic shoppers fuel economic madness

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In March, Ralph Ronzio went to a warehouse in a seedy part of Orange County, California, to watch his condo auctioned for half what he'd paid for it.

Ronzio had bought the place for $329,000 in 2005, when he moved to Southern California from Rhode Island to take a job at a data-storage company. It was the first place he'd ever owned.

"It was totally my bachelor pad. Not much inside other than the usual leather couch and the big screen TV. My fiancee made me sell the couch."

That wasn't the only thing that changed when Ronzio got engaged. His fiancee had two young children, and there wasn't enough room in the condo for all four of them. So last year, Ronzio bought a house 14km away and they all moved in.

He figured he could rent the condo and cover his costs. He figured wrong, Bloomberg Businessweek reports.

The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 mortgage.

When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancee took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.

"I bought myself an iPad."

It used to be that someone like Ronzio could be fairly certain of the outcome when spending a few hundred thousand dollars on real estate.

Housing prices were headed in only one direction. You could surf the boom and borrow against your home equity to pay for all manner of splurges - a vacation, a flat-screen television, or the latest Apple gadget.

Considering that housing prices almost doubled from 1999 to 2006, there was always an escape hatch: sell your house and make enough money to pay it all back.

That was the old normal.

Last year, Mohamed El-Erian, chief executive officer of Pacific Investment Management, manager of the world's biggest bond fund, declared a "new normal", a global realignment in which the US consumer, no longer a hungry monster, became cautious and subdued.

The current circumstances might be better described as the new abnormal, in which no one knows anything.

In June, the Conference Board Consumer Confidence Index fell 9 points after an 11 per cent drop in the S&P 500 the month before. New housing starts were at an eight-month low.

Meanwhile, the unemployment rate still hovers near double digits. That's 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke added to the anxiety with a July 21 declaration that the economic outlook is "unusually uncertain".

So who are all those people at the mall? "Some consumers are probably liquidity-constrained," says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund. But 90 per cent of Americans do have a job, and maybe 70 per cent are confident about them. And maybe half of those have liquidity."

On a recent afternoon, Lucy Johnston, 37, an accountant from Tulsa, Oklahoma, could be found at the Fashion Show mall on the Strip in Las Vegas. She's cutting back on shopping and eating out because of the recession.

"It's really tough right now," Johnston says. "I don't do many full-on spa days anymore." Yet there she was, shopping and vacationing in Vegas with her husband.

"We've pulled out all the stops." The new abnormal has given rise to a nation of schizophrenic consumers. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo.

Companies such as Apple, whose net income jumped 94 per cent in its last quarter, and Starbucks, which saw a 61 per cent increase in operating income over the same time frame, are thriving. Mercedes-Benz is having a record sales year; deliveries of new vehicles in the US rose 25 per cent in the first six months of this year. Lexus and BMW were up.

Though luxury-goods manufacturers such as Hermes International and Burberry Group are looking primarily to Asia for growth, their recent earnings suggest stabilisation and even modest improvement in the US.

Some of this is a reminder that the rich have been largely shielded from the recession's ravages.

"All of my customers think we are out of the recession," says Marika Baca, an associate in the women's department at the Barneys New York fashion store.

"This time last year, it was bad. But now the women who were reluctantly picking up one piece are easily buying three."

Aspirational middle-class consumers say they are also yearning to get their hands on the same high-end merchandise, just as they used to do.

In such an environment, optimism about the economic future ebbs and flows constantly, with far-reaching consequences for a nation in which consumer spending accounts for 70 per cent of the gross national product.

It's an economy that suggests an EKG-shaped recovery - a sequence of mini booms and busts as consumer fads and pent-up demand drive sales, until the impulses fade.

Consumer confidence was edging up earlier this year. The stock market had rebounded. It looked like the economy took on aspects of normal behaviour - and then it all fell apart.

In June, the stock market gave back 4 per cent of its value. Like teenagers suffering mood swings, consumers lost their nerve all over again.

On Tuesday, the Conference Board reported confidence was at a five-month low, because of job insecurity.

American Express released the results of its consumer survey on July 13, showing more willingness to spend, damped somewhat by guilt and despair on the part of some of these same respondents.

The credit-card company found that 51 per cent of consumers had fallen behind on their annual savings plan, in part because they were either making impulse purchases or simply spending beyond their means.

There it is: gloom, muted optimism, and wild abandon.

What if these things aren't exclusive in the new abnormal? Frank Veneroso, an investment strategy adviser in Portsmouth, New Hampshire, follows the nation's saving rate. It was his opinion that high debt levels and economic fears would force Americans to rein in their spending and increase their savings.

In the early part of the recession, that's what happened. Then it stopped happening.

Veneroso writes the nation's wealthier citizens were so relieved when the stock market rallied last year after the financial crisis that they went on a "celebratory spending spree".

The recent market turmoil will put a stop to it and savings will start to inch back up, Veneroso says.

Stephanie Redmond, a 25- year-old electronics worker, talked about her financial woes as she shopped at Miami's Dolphin Mall. She says she is pessimistic about the economy.

"I need a new car, but I don't plan on getting one anytime soon."

Instead she recently bought a plane ticket to New York and stayed in a Times Square hotel. "It was my first time, so it was a lot of fun."

One way of understanding Apple's recent success - the company announced "all-time record" revenue of $15.7 billion for its quarter ending on June 26 - is that the iPad is positioned as a compromise product for people who crave the kick of a new Apple gadget and don't want to go for a Mac.

"I was talking to someone recently who said to me 'I bought the iPad because I can't afford a new iMac'," says Carla Serrano, chief strategist for Apple's advertising agency. "But the iPad does hardly anything that an iMac can do."

Mass marketers have a tougher time seducing consumers with psychological value. Burt Flickinger, a retail consultant based in New York, says Procter & Gamble is struggling to keep people from abandoning its Ivory soap and Crest toothpaste for generic brands.

Better-educated shoppers understand how little difference there is in quality on many household items.

Ran Kivetz, a professor of marketing at Columbia Business School, has done research on consumer psychology. He says that consumers' brains lack a line that separates spending from saving. We practice a certain amount of thrift so that we can justify blowing a large sum frivolously.

"We feel guilty" about spending, Kivetz says, which can lead to more irrational purchasing.

That's is exactly what's happening now, according to Kivetz. Consumers were quick to reduce spending when the recession arrived. Then the recession lasted longer than expected, and the new abnormal set in.

"At the end of the day, people are saying, 'There is still risk. I gotta cut back.' But this is not a typical one-year recession. Life has to have some normalcy. I have to have some luxuries."

- BLOOMBERG