The Consumer Upside Of An Economic Downturn

Consumers have a heightened sense of their access (or lack thereof) to money during recessions. Initially, most consumers react with an increased focus on the price of goods, ignoring quality or other details.² This focus can be so intense that it even causes cognitive burden.³

There are long term behavioral benefits from these financial restrictions. In an attempt to lessen the burden of financial restriction, consumers more effectively use their resources. Consumers post-2008 recession were better at addressing opportunity costs and making decisions.1 Individuals who were exposed to financial restriction over a long period of time were so aware of monetary value that they were less susceptible to pricing tricks, hidden fees, and taxes.¹

Today, experts are predicting a similar movement among younger generations in the post-pandemic phase. They note this generation will be more enlightened with their spending — they will expect a higher return from purchases while also considering their social impact.^4,5,15 The implications of this are crucial for a functioning economy.

“We want what we can’t have” — and in a recession, we want it even more. This familiar behavior even impacts those who aren’t experiencing financial restriction, yet feel restricted because they feel that they should prepare for a downturn.5 Once we notice our limitations, we intently focus and frustrate ourselves with them.

When faced with limited choices, consumers cope by savoring ordinary moments. Consumers shift their spending habits towards lower-cost goods that provide feelings of enjoyment or luxury. For example, in past downturns, women have consistently bought more lipstick.1 This behavior is occurring even today. Sales in clothing retail are decreasing, compared to their usual increase in years prior.^8,9,10 Demand is shifting toward providing higher quality products in smaller sizes.⁷

Instead of purchasing plane tickets for exotic locations, consumers are spicing up their summers with more purchases of home party sprinklers and party leis.⁶ Consumers are looking for more frugal ways to enjoy ordinary moments, instead of spending money on goods like apparel. Our attempt for enjoyment will still prevail, but it may be more of a “bite-sized” fun than a true indulgence.

Not only do individuals better enjoy ordinary experiences, but they are also more creative with their limitations. Researchers at John Hopkins University and the University of Illinois asked participants to complete tasks such as creative writing, solving problems, or creating products. The participants who were asked to think of their experiences with scarcity produced more novel products and suggested better solutions with their products.¹¹ Ethnographic studies have shown individuals from lower socioeconomic backgrounds have a better ability to use everyday products in a variety of ways, such as using tinfoil for wallpaper.^11,12 Limited choice availability may cause negative behavior upfront, but in the long term can drive innovation.

Another aspect of a recession is that it throws us into uncertainty. In order to cope, reactions span from buying beauty products to gaining a sense of control or eating higher-calorie foods.1 During these times, we are more likely to value short term information. For example, investment managers are being urged to update how they supply information to clients in tighter cycle times with more real-world activity.¹³ The irrational decision making can go as far as to impact our parenting — where parents are found to spend more on their daughters than their sons when they are doubtful about their financial future.¹⁴ The research suggests that people consider their daughters more likely than their sons to have children, and unconsciously cater to ensure their family descent. These examples demonstrate how uncertainty influences our decisions in strange ways. We unknowingly think long-term but prefer guarantees to assure us.

To summarize these behavior changes, there are three pieces of insight to keep in mind as consumers enter another recession:

1. A little goes a long way – across all of the different categories in a recession, we learn to live with less. Whether it is savoring moments with increased limitations, or buying smaller goods to feel luxury on a budget, consumers focus on using their financially available means to make memorable experiences in any way they can.
2. Money on the mind – all people have an increased awareness of the economy during a downturn. Consumers in times of financial hardship are more price-aware and are aware of changes in the economy as they use the information to prepare themselves.
3. The upside of a downturn – initially, we may respond abruptly to a recession. But our coping mechanisms in the long term spur beneficial change like more innovative behavior, and reduced susceptibility to pricing tricks.

Adaptability is on our minds with the current onslaught of new events on a weekly basis. Through analyzing previous recession research, we know that consumers cope with financial hardship in unique ways. Yet these very same coping mechanisms can ignite long-term behavioral changes that bring substantial benefits. Although we can’t yet predict the consumer who will emerge from this recession, we have a good idea they will be more aware, innovative, and resilient than before.