SAGE Advice: Holiday Discounting, a Recession -- and the CBI

By: Leo Shapiro, Steve Yahn, and Erik Shapiro Newspapers benefit as retailers try to jump start Christmas spending by advertising discount prices in advance of the season. While fear of recession and a lackluster holiday spending season may trigger discount price advertising, more than advertised price discounts are needed to protect profits when a recession actually hits.

Most but not all recessions arrive on cats? feet, without much fanfare. Even so, newspapers and their advertisers need to stay alert and ready to shift to recession-mode operations should a recession actually begin. Because U.S. consumers are the best hedge against recession, they are the best place to look in order to see whether a recession has actually hit and whether recession damage control need be started.

Consumers act like millions of Lilliputian governors on the economic engine, helping to keep it from overheating or sputtering out. We can know how well consumers are doing at saving us from recession by keeping an eye on the Consumer Balance Index, or CBI.

As of October 2007, thanks to consumers? financial management skills and their willingness to keep on spending in the face of bad economic news, the U.S. economy continues to soldier on in these troubled times without receding into recession. Watching the CBI month to month can give newspapers and their advertisers a head?s-up signal as to when to shift to recession-mode operations should a recession actually hit.

Leo J. Shapiro and Associates derives its monthly CBI from the answers to two questions asked regularly in its monthly survey of how the U.S. consumer feels. First consumers are asked if they feel better off financially ? considering the balance of all income and wealth expenses ? now than a year ago. Then they are asked if they think they will feel better off financially a year from now. The base measure that set the index at 100 was taken in 2000. When more consumers than in 2000 express positive answers to these questions, the index rises above one hundred, and when more consumers than in 2000 express negative answers, the index falls below 100.

Consumers ? in aggregate ? excel at managing to match expenditures with income, so well that the CBI, in 20 of the last 25 months, has not moved beyond a ten-point range, not rising above 104 or falling below 94.

A recent Wall Street Journal article listed three ingredients for what it sees as a coming recession: falling house prices, rising oil prices, and increasing caution on the part of borrowers and lenders. But we say that as long as consumers can adjust their spending to match their income, the recession recipe is incomplete.

For the last twelve months, the CBI has been above 100 for five months, below 100 for another five months, and at 100 for two months. In September, the CBI fell to 96, near the bottom of its regular range. In October, the CBI rose to 100.

The Bottom Line

We?ll keep you informed of changes in the CBI on a monthly basis, starting with this column. It is like having a canary-in-the-coal-mine-cam. When the CBI remains below 100 for an extended period and dips below its range, then external forces will prevail, the recipe will be complete, and a recession will be in the works.

Then, take drastic action to protect profits and capital. Until then, keep cool.

Otherwise, I Pluribus Unum will keep us safe from the slings and arrows of outrageous housing and oil prices.