Downturn buys

The science fiction book Ready Player Two is currently a #1 New York Times Best Seller. Unemployment in the U.S. last month was 6.7%. The two most popular programs on Netflix are the chess historical fiction The Queen’s Gambit and children’s nursery rhyme series CoComelon. Private labels are on a roll to end all rolls. The most popular appliances on Amazon.com are all ice cube makers.

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Countertop ice cube makers: the appliance you and everyone else never knew you needed.

Am I just listing off random facts? I hope not! 

It turns out that broad economic conditions have reliable effects on the products we choose to buy, and today we’ll explore those patterns. 

Of course, many who are unemployed and in tough financial situations right now cannot afford basics like food and housing. This is a crisis

Here, I’ll focus on the purchases people choose to make with their discretionary income. What are the effects of recessions on our product preferences, and how is that playing out today?

General spending pattern changes: a lesson from the early 1980s

The early 1980s, economy-wise, were not good. At the height of the “global recession of 1982,” a group of researchers went out to interview a diverse group of over 1200 working-age people all over the Netherlands to understand how they were managing their spending. It turns out spending behaviors were pretty consistent. People used four main tactics, in the following order:

  • Price: Buying the same products at a cheaper store, shopping sales, and buying cheaper brands.

    Nowadays: Hello, private store labels!

  • Quantity: Buying less, especially when it came to convenience products, waiting to replace expensive goods like a car or furniture, and using services less often.

  • Quality: Here, there were interesting differences based on household income. For high-income households, this meant buying products that were higher quality. Presumably high-quality products would be more durable and would not need to be replaced as soon. For lower-income households, this meant moving to lower-quality, lower-price products.

    Nowadays: Surprisingly-popular luxury smart appliances and Dolce & Gabbana X Smeg collaborations.

  • Lifestyle changes: Doing home, car, or clothing repairs by yourself, sharing and borrowing products from others instead of buying new ones, and voluntary simplicity—e.g., selling a car or home. These are tough! While these strategies might be the most effective ways to cope with lost income, they’re typically a last resort because they’re a signal to others (and to people themselves) that those undertaking the actions are affected by an economic hardship.

 

Things vs. experiences

Material goods are tangible and can be retained over time, while experiences are intangible and can only be lived through once (apart from the memories, which can do us a lot of good).

Considering financial constraints pushes people to buy long-lasting material goods, rather than experiences. Why? Consider two people: Stan and Dan. Stan has financial restrictions, Dan doesn’t. Stan and Dan both buy something that doesn’t last, like a lobster roll. When the desire to get another lobster roll hits (perhaps as soon as the next day), Dan can get himself another roll, but Stan can’t. But if Stan instead spends the $20+ on a cornhole set, he can keep on enjoying lawn games with his buddies the next day, and the next day, and maybe for years to come.  

comprehensive set of experiments found exactly this pattern: that considering financial constraints shifts people’s preference to material goods, and that this shift is due to considering how long-lasting their use can be. 

In one experiment, participants were asked to choose one from each of five pairs of gift-card match-ups. One of the cards in each pair was for a store selling material goods (e.g., Zappos) and another, equally desirable, was for a store selling experiential goods (e.g., Fandango – remember movie theaters?). To encourage participants to act in a way that reflected their true beliefs, the researchers told them that two study participants would receive all of the gift cards that they chose. 

Here are the findings: the more participants considered their financial constraints, the more likely they were to choose gift cards to stores selling material vs. experiential goods. 

Figure 1.png

Image source. People considering financial constraints showed a bigger preference for material goods.

 

This pattern also held for material goods that could be considered frivolous or wasteful. The researchers created pairs for which the experiential purchase (e.g., dinner at an Indian restaurant) was considered less frivolous than the material purchase (e.g., a revolving tie rack). 

But again, participants who considered their financial constraints were more likely to choose the material good. They also reported that they made their choices based on the longevity of use (“How long my chosen option would last for.”)

 

Figure 2.png

Image source. The same pattern held for frivolous material goods, like a revolving tie rack or vanity mirror.

  

Interestingly, the preference for material goods disappeared when materials goods were short-lived. 

In one experiment, participants were given goal scenarios (e.g., to stay dry in the rain) that they could achieve by buying an experience (e.g., a drink at Starbucks while waiting for the rain to pass) or a material good. For half of the participants, the material good was long-lasting (e.g., a reusable poncho), and for the other half it was short-lived (e.g., a single-use disposable poncho). 

Half of the participants were asked to write and think about the financial constraints they had in their life. This, as expected, led those participants to feel more financially constrained and to consider their financial constraints more while choosing between options.

Here was the critical interaction: being more aware of their financial constraints made those participants who had a choice between an experiential purchase and a long-lasting material purchase to choose the material purchase. The pattern reversed for those participants who were choosing between an experiential purchase and a short-lived material good. In other words: financial constraints don’t push people to buy a single-use disposable poncho. Nobody needs that stuff.

Figure 3.png

Image source. The preference for material goods vs. experiential goods doesn’t hold when material goods are short-lived.

 

Looking at broader economic patterns, the study also found that Americans spend proportionally more on goods vs. services when the U.S. economy is doing worse. 

That’s also the case now: we’re spending more on goods than we did last year. Of course, this isn’t a fair comparison given the backdrop of COVID and lockdowns. 

 

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Image source. Americans have shifted spending from services to goods.

 

Still, I’ll take the popularity of ice cube makers as a data point. What has more longevity: a bag of ice or a machine that will produce “delicious, chewable, crystal clear, bullet-shaped ice cubes in minutes,” for-close-to-ever?
 

Enough with the heavy stuff

We’ve covered the private labels, we’ve covered the ice cube makers. Let’s move on to the products we use to keep ourselves entertained.

Here’s a New Yorker cartoon from this week’s issue:

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Image source. I’d say this cartoon is pretty light, what do you think?

 

A recent charming study found that in bad economic times, we comfort ourselves with lighter cultural products. And when the economy is booming, we can handle heavier themes.  

The researchers defined light media as media that's happy, upbeat, and that distracts people from the challenges of everyday life. Meanwhile, heavy media is sad, dark, fosters introspection, and confronts difficult themes.

One theory, the broaden-and-build theory, proposes that positive emotions encourage people to broaden their attention, explore, and more easily incorporate novel information. Positive mood might act as a resource: those who are “rich” in positive mood might be less put off by the possibility of interacting with negative information.

When the economy is good, and there are fewer stressors in our lives, people might experience more positive emotions and be able to handle the dark themes of heavy media. But when the economy is bad, people might not have the positive mood stores needed to engage with heavy subjects and introspection.

That’s the pattern when it comes to New Yorker cartoons. 

In one experiment, the researchers collected all the cartoons that appeared in New Yorker issues from 1952, 1962, 1972, 1982… up to 2012. There were 6435 cartoons in total. Next, over 1400 participants rated 15+ cartoons on different dimensions. The key dimensions were the tone of the cartoon (whether the cartoon paints a negative or positive picture of humanity) and its darkness, which were combined into a composite score. The scores of the cartoons for each month were averaged to give an overall score of how light (or dark) each month’s tone was.

The researchers then examined the relationship between cartoon tone and two measures of the U.S. economy: the unemployment rate and the University of Michigan's Index of Consumer Sentiment, or ICS. The ICS is a monthly survey of a representative sample of Americans and asks questions like “Do you think that during the next 12 months we'll have good times financially, or bad times, or what?” For whatever reason, the index is normed so that a score of 100 is equivalent to how consumers felt in May 1964. Its range is quite large, with a low of 51.7 (May 1980) and a high of 112 (January 2000). 

In line with predictions, New Yorker cartoons had a lighter tone in months when unemployment was high and ICS was low. As an aside, the researchers also found a relationship between the passage of time and the emotional tone – more recent cartoons were darker in tone (if you thought the New Yorker was getting bleaker, you’re right!).

As of December 2020, the ICS is 81.4, around 18% lower than the same time last year. Last month’s unemployment rate was almost twice as high as last year’s. And current New Yorker cartoons are light, as we’d expect. 

The study found similar patterns for other media types: music, books, and movies. For example, while it’s not a perfect distinction, songs in minor key tend to sound sadder than songs in major key (seriously, this version of R.E.M.’s Losing My Religion shifted to a major key is uncannily poppy). Lighter sounds dominated music when the economy was worse: there were proportionally more #1 hits in major key when unemployment was high and when consumer sentiment was low.

The same pattern held for books. The researchers collected the #1 New York Times bestsellers and categorized them into 12 genres. Six were considered heavy (drama, crime, thriller, mystery, etc.), and six were considered light (e.g., science fiction, historical fiction, fantasy, comedy).  Lighter books performed better when consumer sentiment was low.

Movies? Same deal. Lighter movies were more likely to reach number one at the box office when consumer sentiment was low and unemployment high.

In a cool (research) twist, in a final experiment, participants were told to imagine the economy was good, bad, or were asked to do a different, neutral, task. Those people who imagined living through a bad economy were more likely to prefer re-watching light (vs. heavy) movies that they had seen recently. Hoowee.

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Image source. People who had vividly imagined living in a bad economy wanted to rewatch light (vs. heavy) movies they’d seen recently.

So that about covers some cool effects of the economy on discretionary purchases: our ever-changing tastes in books, tv programs, durable goods, and New Yorker cartoons.

We’ll see how ice cube makers do next year.

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