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The Catch 22 of Increased Consumer Purchasing Power

Over the past decade the consumer has garnered significant purchasing power through the proliferation of information available on the Internet, social media channels, and the like. Retailers are becoming “showrooms” for Internet purchases driving major chains to rethink their operating strategy.  Pricing pressure for items across all categories and channels have remained largely flat, while new innovation has been incorporated into the products.

Further pressuring consumer spending are other factors such as higher food and gas prices, lower incomes, and heavy personal debt loads.  The combination of smarter consumer purchasing and lower household discretionary spending ability leads to a difficult environment for consumer goods manufacturers.

Consumer Goods Manufacturer’s Response

To combat the top-line pressure on pricing and aggregate consumer spending, consumer goods manufacturers have been busy improving productivity.  Many are investing in:

  • Highly productive manufacturing operations
  • Reorganizing global supply chains
  • Innovating new products
  • Reducing complexity and unnecessary costs
  • Implementing process and technology initiatives

Unfortunately, these haven’t been enough and many have undergone laying off excess employees.  The result has been the maintenance of industry-wide operating margins but with a net reduction in the workforce.

So Here’s the Rub

The consumer power that benefited consumers in the early 2000’s has come to roost in the late 2000’s.  The layoff of employees in response to the competitive pressures has in fact pressured aggregate real personal incomes, thus exasperating the situation.  A recent article in the Wall Street Journal “Piecing Together the Job-Picture Puzzle” highlighted the broken relationship in a 40-year old economic theory called “Okun’s Law.”  Essentially this relationship measures GDP growth and job growth.  Ms. Roamer, President Obama’s former chief economic adviser, suggested corporate fear played a role in their aggressive layoffs and reluctance to rehire.

Our analysis shows that we are in a secular productivity cycle impacting both the consumer and the manufacturers.  Our ability to access information to purchase goods and services at favorable prices has never been greater. Manufacturers and service providers are forced to drive productivity improvements to respond. These adjustments brought together are forming a new employment picture and will lead to a significantly slower job creation.

Late last year we published a piece “Do You Want Jobs or Productivity.”  Of course we want both. Consumers want productivity to the degree it keeps innovation high and prices low.  Manufacturers want productivity to the degree it keeps profits high and enables them to grow, and thus hire.  However, in the meantime we will need to work through this re-balancing of jobs and productivity.  What do you think?