You can't pick up a paper or check out the news online today without seeing stories about a looming recession, the housing crisis or even potential food shortages. At the same time, the country is going through a credit crunch and wages are flat.
All of this bad economic news has consumers jumpy. Instead of buying name-brand, many shoppers are buying generic. Instead of shopping at upper-end retailers, they are flocking to Target, Costco and Sam's Club.
Economists are saying the U.S. is in the early stages of a prolonged period of belt-tightening.
Consumer purchases of items other than food and gas have fallen this year, according to the Department of Commerce. Sales of a broad range of products — everything from clothing to home furnishings to automobiles (especially SUVs) — were lower in March 2008 than they were in March 2007.
This slump extends to services too, such as air travel, restaurants, hotels and casinos.
Yet major tech companies like Intel, HP, Apple and IBM all posted stellar earnings for the last quarter, and one of the big PC makers, Hewlett-Packard, has even given future guidance that suggests its PC sales will continue to be solid.
The tech sector on a whole seems to be relatively strong, while car dealerships, restaurants and certain retail chains are having a tough time getting consumers to come in to buy their offerings. I was in an upscale restaurant in Newport Beach, Calif., recently and they had a "recession special" on the menu.
The word on the street and in the media in Silicon Valley is that while the tech industry is not completely recession-proof, it can ride out even the worst economy and perhaps even thrive. Businesses still need computers and IT services to run smoothly, and consumers have become even more dependent on the digital technologies and gadgets that now drive their lifestyles.
The buying public apparently still sees the need to buy PCs, iPods, cell phones, digital cameras and even HDTVs while cutting back on other expenses.
A recent New York Times article about people spending less on food quoted a shopper at a big-box retailer who rationalized buying a $2,000 HDTV by saying that at least he can stay home and watch movies.
I recently spoke with a young couple who told me they were going to spend their government rebate check on a new HDTV, and they were planning to go out to movies and restaurants less once they have their new wide-screen television.
I actually believe that there is an important trend going on here that relates to something called "cocooning." Here's Wikipedia's definition:
"Cocooning is the name given to trend that sees individuals socializing less and retreating into their home more. ... The term was coined in the 1990s by Faith Popcorn, a trend forecaster and marketing consultant. Popcorn identified cocooning as a commercially significant trend that would lead to, among other things, stay-at-home electronic shopping.
... The creation of the World Wide Web (WWW), home entertainment technology, advances in communication technology (cellphones, PDAs, and Blackberries) which allow 'work-at-home' options and demographic changes have made cocooning an increasingly attractive option."
Wikipedia's definition may not be directly tied to economic issues, but in many ways the poor economy has made this concept relevant, and I think it partly explains why consumer tech spending remains strong, especially spending on home-theater gear and home PCs.
Even the continued strong demand for iPods and smartphones is explained by a type of cocooning that I call "mobile cocooning."
With gas prices going up, people are increasingly relying on public transit or car pools to get to work and school. During their commute, they turn to iPods and smartphones for privacy as well as entertainment.
My company talks to a lot of high school students about their tech purchasing habits, and kids have told us their parents, because of gas prices, were cutting back on taking them to school, so these kids have started to ride their bikes or walk instead. They pointed out that their iPods and music phones are now more important to them.
There are several other factors that should keep tech spending in the positive column, albeit with more modest growth than in years past.
One is the back-to-school market. Various PC vendors told me they continue to see demand for new PCs coming from schools and consumers, and are planning accordingly. While they may not sell a lot of top-of-the line PCs to this audience, they all have new value models in the works that should help them keep their PC sales volumes up as well as contribute to their earnings.
Also, the transition from analog-to-digital broadcast TV is picking up steam, with the cutoff date next February looming large for consumers. HDTV vendors expect demand for their products to rise significantly the closer we get to this February date.
Interestingly, some economists think that this belt-tightening is actually good for the U.S. They point out that the free credit market has tempted consumers and businesses to live and spend way beyond their means, and that an economic downturn might be a positive correction.
These economists feel that the U.S. and consumers will come out stronger as they learn to live with less and actually become more savvy buyers of the goods and services that they need.
To that end, the various technology companies hoping to attract these more "savvy" consumers need to take heed and watch this consumer change closely.
In the not-too-distant future, it could dramatically impact what people actually buy in the way of tech products. Value-based PCs may drive PC-sales volumes, and while this keeps the numbers up, it does impact earnings since these are low-margin computers.
At the same time, while people will still buy iPods, digital cameras, HDTVs and cell phones, they may go for the cheaper models instead of the mid- to top-of-the line systems that drive most of the market today.
In fact, our research shows that consumers are looking for PC products with price tags $300 to $500 cheaper than the ones they were looking at just a year ago at this time.
The conclusions to be drawn from all this data? It's crunch time for consumers, but even in this difficult economy, the tech industry looks like it can weather this storm better than other industries.
Keep a close watch on the tech sector in the coming months, focusing on those tech-related products that allow users to "cocoon" to save money.
Tim Bajarin is one of the leading analysts working in the technology industry today. He is president of Creative Strategies (www.creativestrategies.com), a research company that produces strategy research reports for 50 to 60 companies annually — a roster that includes semiconductor and PC companies, as well as those in telecommunications, consumer electronics, and media. Customers have included AMD, Apple, Dell, HP, Intel, and Microsoft, among many others. You can e-mail him directly at firstname.lastname@example.org.
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