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September 02, 2009

Pent-up demand

As it appears the recession is coming to an end, consumers are stirring. Both home and car sales have improved, and there's optimism these gains will continue. Is there something automatic that will make consumers buy more durable goods when the recession ends?

"There is, and it's what's called pent-up demand. Here's what happens during a recession: people obviously have to buy food, they have to have medical care, they have buy their essentials. But what people do because they're scared because their income may have fallen because they may lost money in the stock market or their home, they don't buy those non-essentials. So they drive their car longer. If they were thinking of buying a bigger house, they don't do that. Underlying those actions for many is that they wanted to do that. They wanted a new car. They wanted a bigger house or needed a new house. So internally there's this sizzling. There's this urge to have bought these things, but they didn't. Then, however, when the economy does improve, and people feel better about the economy, and maybe someone who was unemployed gets a job, all of the sizzling comes to the forefront, and we often see a surge in buying of these big ticket, non-essential items. We often see a surge in car buying - we've already seen some of that - and home buying, which appears to be on the upswing. This is what economists call pent-up demand, and it really is what leads us out of a recession. It's often why the initial quarters after a recession are very strong, and then we settle back down to normal."

Posted by Dave at September 2, 2009 08:00 AM