As the year unfolded, many companies made executive decisions based on their fears of an impending recession. They went into survival mode, slashing marketing budgets and even scaling back on digital innovation. However, to their surprise, news broke that there was no recession at all. In fact, consumers were spending on a wide range of products and services. This left the businesses that bet on a recession in a precarious position.
Amidst this uncertainty, well-established brands found themselves facing little competition as their rivals pulled back. Consumers naturally gravitated towards these familiar faces, resulting in significant market-share gains for larger companies. While it may have seemed like a wise move on paper, the reality was that these CFO-driven decisions proved to be detrimental for businesses. Consumer behavior outside of a recession is as unpredictable as timing the stock market. And this year, consumers defied logic by increasing their spending.
Of course, the decision to pull back on investments wasn't entirely irrational. Just a year ago, everyone was gripped by the fear of an imminent recession. In October 2022, economists surveyed by Reuters revealed that 65% of them believed a recession was on the horizon within the next year. Additionally, a Harvard CAPS/Harris poll conducted in December 2022 showed that 80% of Americans either believed the country was already in a recession or predicted one in the coming year.
Despite these widespread concerns, the recession never materialized. Instead, the economy experienced steady growth throughout the year, culminating in a 4.9% increase in the third quarter of 2023. This growth was primarily fueled by robust consumer spending, which rose by 4% for the quarter and accounted for 2.7 percentage points of the total GDP increase. These were clear indications of a strong economy.
To everyone's surprise, consumers had more money to spend than ever before. Thanks to stimulus bills and pandemic-related shutdowns, the median net worth of Americans rose by 37% between 2019 and 2022. Currently, individuals still have an estimated extra $1.7 trillion in savings. Even in the third quarter of 2023, disposable net income grew by a staggering 3.8%, nearly triple what economists had forecasted. With the economy gradually returning to a post-pandemic normal, consumers are eagerly seeking out experiences to spend their money on.
During the summer, consumers embarked on a shopping spree of sorts. Spending at movie theaters, restaurants, sporting events, and even casinos experienced an uptick in August. And in September, there was a significant surge in spending on international travel and airline transportation. Overall, the increase in consumer spending during the last quarter was evenly distributed between goods and services.
In conclusion, companies that wrongly anticipated a recession found themselves at a disadvantage as consumers defied expectations and continued to spend. The resilience of the economy was evident, and consumers had the means and desire to indulge in various experiences. It serves as a reminder that predicting consumer behavior can be a challenge, even under the most uncertain circumstances.
The Resilience of Retail Sales
Over the past six months, retail sales have experienced a significant increase, marking a positive start to the holiday season. In fact, online spending on Black Friday alone rose by 7.5% this year, as reported by Adobe. This growth aligns with the projected 7-9% boost in e-commerce holiday sales. Although holiday season sales are anticipated to rise by 3-4% - a slight dip from the pandemic period - it remains a promising increase.
The Consequences of Withdrawing from Marketing
Challenger companies that opted to reduce their marketing expenditures during this time unfortunately wasted an entire year without making their presence known and vying for new customers. These smaller brands bear the brunt when organizations across the board cut back on their marketing budgets. Consumers tend to stick to what they know rather than exploring unfamiliar options.
Acknowledging Past Mistakes
It is crucial for companies to recognize their error in pulling back due to fear of an impending recession that never materialized. Looking ahead to 2024, the lesson is clear: resist succumbing to fear and reconsider any decisions to cut back on marketing and other growth-oriented initiatives. After all, consumers still possess a considerable amount of disposable income, and the number of Americans who believe the country will steer clear of a recession has nearly doubled in the past year. With the Federal Reserve maintaining steady rates and hopefully putting an end to their economic blood-letting policies, confidence is building.
Challengers Must Maintain Momentum
While established companies may wish for upstarts to remain idle, conceding market share without a battle, challengers must press on with unwavering determination. These companies have an even greater gap to bridge after enduring a lost year. Although the recession never arrived, the aftermath was real and consequential. Hopefully, those forecasting consumer trends will learn a valuable lesson akin to that of stock-market timers — retreating from progress in the marketplace comes with its own set of risks.