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Belt tightening, literally

July 30th, 2008 · No Comments

With food and energy prices running amok, income not holding pace, wealth badly battered by falling house and equity prices, and credit much less available, what can the stalwart of the global economy, the US consumer do? Some belt tightening. But old habits die hard..

A full 70% of the US economy drives on consumption, and it’s also a main pillar of the world economy, although in a slowly decreasing manner as countries like China have started to boost reliance on domestic demand.

And as we summarized in the intro, all is not well. Debts are at record levels, but as assets have dived in value, houses can no longer be used as a deposit-less ATM machine, other forms of credit have become hard to get, and the result is a further deterioration in the credibility of the American consumer.

That final day of reckoning that many economist have been predicting for years now seems upon us. Debts will have to be repaid, and belts tightened. The American consumer has lived beyond his means for too long.

We have reported evidence that US consumers are actually respond to higher energy prices in the way that economist predict, cutting back demand.

How has the famous American appetite faired in response to rising food prices? Well, not by a whole lot:

  • But with soaring food prices sparking protests in many countries and more than 800 million people going hungry every day, U.S. food portions are under scrutiny. A lightening of the American plate could ease pressure on worldwide demand, but not everyone is hopeful change will be coming any time soon.
  • Portion sizes in the United States not only exceed those in less-developed countries, but also in the developed world. In fact, Americans have the highest per capita daily consumption in the world, eating 3,770 calories a day, more than a Canadian at 3,590 calories or an Indian at 2,440, according to data from the U.N. Food and Agricultural Organization.
  • “We’ve looked at large portion sizes almost entirely in terms of whether it’s healthy for us, and now we have to consider is that sort of a demand going to be sustainable,” said Paul Roberts, author of “The End of Food.” Roberts believes smaller portions would help. “It would probably be a way to take pressure off of grain markets if we somehow convinced people to take smaller portion sizes.”

Some adjustment is happening though:

  • Americans are putting more thought into food buying. High food prices coupled with a slowing economy have led 71 percent of Americans to eat out less and 48 percent are buying fewer groceries, according to the Food Marketing Institute.
  • Donohue said some 133 million Americans eat out every day. “The typical adult eats at a restaurant nearly six times a week, and more than half say eating out is an essential part of their lifestyle,” he said.

Economics is conspiring against smaller portions!

  • But restaurants are not making big reductions in portions, making only small moves like not automatically refilling bread baskets or introducing calorie counter options. Wootan said large portion sizes are unlikely to fade away despite increasing food costs since the actual farm value of food is low for restaurants compared to other costs, such as labor, advertising and transportation.
  • “So if you pay a dollar for an order of French fries only about 20 cents goes for the potatoes, the oil and the salt,” she said. “When a restaurant sells a large fry instead of a small fry, the cost of the potatoes themselves adds only a little bit of cost and all their other costs of doing business stay the same. So companies make a lot more profit off of big portion sizes.”

The land of ‘super-size me’, is not going to change this habit any time soon. One can always blame foreigners:

  • President George W. Bush caused a stir earlier this year when he blamed India’s growing wealth and demands for better food for raising food prices. But many worldwide pointed the finger back at Americans’ tummies.

Tags: The Markets