Back in 2009, RSR partner Paula Rosenblum coined a great phrase to explain retailers’ hope of a strong holiday season: “Frugality fatigue “. At that time, consumers had engaged in serious belt-tightening. Aggressive pricing and promotions were the rule of the day; for example, in July 2009 grocer Safeway Stores announced that after nearly a decade of pursuing something more akin to Whole Foods as a destination for “ingredients for life “, they were rolling out a EDLP ( “every day low price “) campaign in response to consumers’ frugal ways. In January of 2010, the chain’s profit margin dropped 12.7% as a result, although by summer of 2010 the grocer had managed to build it back up to its “level set ” of about 1.6%.

The point of such an action by a national chain was obvious; while consumers were feeling the strain of the recession, retailers had to do something to maintain traffic, and thus – presumably – loyalty. In 2009, there was a lot of talk about the “new normal ” in consumer spending. In January 2010 the Gallup organization reported that “seven in 10 consumers (70%) say they are cutting back on how much money they spend each week and 22% say they worried yesterday that they spent too much money. “

All of this is the backdrop to reports this week that retail sales are up. While we’ve seen several such reports over the last 18 months, this announcement is different, because it has caused economists and analysts to conjecture that “frugality fatigue ” is the reason. Thinking back to Paula’s comments in 2009, I was pleased to see in my own local paper (The San Francisco Chronicle) the following report:

“‘Frugality fatigue’ is driving a rise in retail sales among consumers who’ve ‘grown tired of putting off discretionary purchases,’ said Russell Price, a senior economist at Ameriprise Financial. Recent gains, including a 6.5 percent increase in February from a year earlier – have been bolstered by improvements in consumer confidence and the labor and stock markets, along with some stabilization in home prices, he said. ‘This has been a long, drawn-out recovery; and for most people alive today, it’s the longest they’ve had to conserve financially,’ said Price, who was among the top-ranked forecasters of quarterly gross-domestic-product growth for the two years ending in February, according to the most-recent data compiled by Bloomberg. ‘As their prospects improve, some pent- up demand is being released.’ “

The 3 Drivers

Economists posit that the three drivers of growth are: consumer spending, investment, and government spending. For quite some time, consumer spending in the U.S. has been the #1 driver. In January, the Federal Reserve Bank of St. Louis spelled it out:

“During the 10 years ending in the last pre-recession quarter (third quarter of 2007), inflation-adjusted personal consumption expenditures grew at a continuously compounded annual rate of 3.47 percent, while overall inflation-adjusted annual growth of gross domestic product averaged only 2.91 percent. During that period, the remainder of the economy—consisting of investment, government purchases of goods and services, and net exports – grew at only a 1.70 percent inflation-adjusted annual rate. “

The question is, can consumers be counted on to sustain today’s fragile recovery? The Federal Reserve Bank of St. Louis explains further:

“Standard economic-growth theory suggests that an economy must continuously invest in new capital goods and structures in order to grow, become more productive and raise citizens’ living standards over time. Empirical evidence confirms the prediction that economies that invest a higher share of their incomes (or that have access to relatively inexpensive investment goods, which presumably results in more investment) tend to grow at faster rates. If consumer spending ‘crowds out’ investment spending, the economy may not grow as fast. Indeed, during our own economic history, higher investment generally has been associated with lower consumer spending, and vice versa, where both are measured as shares of GDP. This is at least circumstantial evidence of some crowding out going in one direction or the other. During the period 1951-2010, consumer spending generally was lower than its average in years in which investment was higher than its average; and consumer spending generally was lower than average when investment was higher than average. “

The Economy Needs Corporate Expansion

On March 26^th, U.S. Federal Reserve Chairman Ben Bernanke commented that “further significant improvements in the unemployment rate will likely require a more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies. “

Let’s break that down. The “accommodative policies ” that Bernanke mentioned relate to monetary policy. “Demand from consumers ” – that’s the “frugality fatigue ” discussed above. The Chairman left out any mention of government “stimulus “; with 2012 being an election year in the U.S., there seems to be almost no likelihood of that happening.

And that leaves “expansion of production “.

How does this relate to retail and technology? As RSR has often pointed out, that, to the extent that investments in infrastructure eventually affect the overall economy, our research shows that re-investment in the business is beyond necessary, it’s essential. In short, consumers are demanding it by virtue of their omni-channel shopping behaviors.

Consumers may have “frugality fatigue “, but they also have demonstrated that they are far more adroit in the uses of anytime/anywhere information to find the best solutions to their lifestyle needs. They are using consumer-grade technologies to find that value, and challenging retailers to service them in a buy anywhere/get anywhere way.

So, it’s kind of a virtuous cycle. Whether investments in new retail capabilities drive new consumer behaviors, or new consumer behaviors drive investments in new retail capabilities, the result is the same – it helps the economy.