Change of Consumer Preferences during Recession

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Consumer preference generally refers to the taste of an individual towards a subject. The satisfaction obtained by the consumer can be defined as the utility. In economics, it is defined as consuming goods during a period (Melitz and Redding, 2014). Economists acknowledged that various factors could affect consumer preference, including personal taste, culture, social environment, etc. In this paper, the student will explore how the macro environment can affect consumer preference, and the focus of the student is the change of consumer preference during the recession.

First, consumers may slide over luxury goods and normal goods during recessions. As we know, the recession is defined as a period in which all economic activities would decline. There are about 48 recessions in the USA in total (Zarnowitz, 1996). After World War II, the most well-known one is the Great Recession from December 2007 to June 2009, and the most recent one is the COVID-19 Recession from February 2020 to April 2020 (Tappe, 2021). Take the COVID-19 Recession, for example. The consumption of luxury goods had decreased sharply during 2020 (D’Arpizio et al., 2020). As the data shows, the global market value of luxury goods had increased from 76 billion euros to 281 euros from 1996 to 2019. However, this value dropped to 271 billion euros in 2020. There was only one sharp decrease before 2020 during this range: the Great Recession from 2007 to 2009. The market value was 161 billion euros in 2007, while it decreased to 147 billion euros in 2009 (Statistica, 2022). This principle may also apply to normal goods. For example, natural gas consumption decreased from 31.08 trillion cubic feet in 2019 to 30.48 trillion cubic feet in 2020 (Statistica, 2022). Likewise, the consumption of electricity had reduced from 3955 billion kilowatt hours in 2019 to 3802 billion kilowatt hours in 2020 (Alves 2021). As the POWER magazine mentioned, recession should be the major reason for reducing electricity consumption (POWER, 2021). However, considering the development of new energy, like wind energy, this reduction is still controversial.

Fondazione Altagamma. “Value of The Personal Luxury Goods Market Worldwide from 1996 to 2021 (in Billion Euros).”

Meantime, the consumption of cheaper goods or inferior goods would increase during a recession. One great example is the consumption of ramen noodles. Although the demand of ramen noodles had increased steadily in 2016, its values increased most from 2019 (106420 million servings) to 2020 (116560 million servings) (Wunsch, 2021). Notably, although Asian countries (China, Japan, South Korea, etc.) still consume the major part of ramen noodles globally, the ramen noodle industry is prospering and expected to reach a volume of 6.27 billion units by 2026 (IMARC, 2021). These facts are consistent with the statement that consumer preference may shift towards cheaper goods.

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The change in consumer preference is understandable due to several factors. First, as we mentioned before, recessions refer to the decline of economic activities. Thus, the GDP would decrease, and the unemployment rate would increase during a recession. As the family income decreases, the budget constraint would shrink. Therefore, the citizens must face the problem of reallocating resources to maximize their utility (Bernstein, 2001). In this case, luxury goods and normal goods may not help consumers obtain maximum satisfaction. The only difference between them is that the demand for luxury goods is highly elastic, while it is less elastic for normal goods. Instead, inferior goods, like ramen noodles, could both solve the problem of food and save money. Second, people’s need for social activities might shrink during a recession. Consequently, luxury goods may not be as important as normal (D’Arpizio et al, 2020).

Plus, due to the high contagiousness of COVID-19, people were required to stay at home. This policy had reduced the productivity of the society because the retailers may not have adequate supply, the factories could not produce as many goods as in the average time, and the supply chain had been hindered due to the lock-down of numerous cities. The scarce resources conflicted citizen’s needs for normal goods. Accordingly, people may not have access to normal goods. Thus, consumers may lower their expectation for high-quality products and turn to inferior goods. Moreover, instant foods like ramen noodles can be stored for a long time. As a result, they would be a great choice for people in the quarantine.

Now that we’ve discussed the change in consumer preference during a recession, is it possible that consumers' preference shift to luxuries after a recession sharply? The answer is uncertain. As a scholar, Luigi Pistaferri, stated, the consumption level of the USA stayed moderate after the Great Recession from 2007 to 2009. Various factors may result in this phenomenon, according to the data. To illustrate, the financial income dropped during the recession because of the melt-down of the stock market. Meanwhile, the real wage declined. Even in the recovery stage after the recession, the growth rate of wages and financial income were comparatively slow. Yet, the property income of residents increased greatly. Therefore, citizens’ disposable income would decrease, in fact. They may choose not to consume but increase the saving account to ensure a life quality (Pistaferri, 2016). Therefore, reflecting on the COVID-19 recession, we may not expect a sudden increase in luxury and normal goods in the near future. And the consumption of inferior goods, like ramen noodles, may keep increasing. Some people may argue that the consumption of luxury goods had increased in China from 2019 to 2020, and this trend may keep existing in 2021 (Ma, 2021). However, the assumption of this statement is China had survived the same recession as the United States. While the fact is Chinese GDP kept increasing even during the pandemic, and e-Commerce took a great part for the increase. Yet, we need to acknowledge that the growth rate of Chinese GDP had been the lowest since its establishment, and the unemployment rate had also increased in China (World Bank Group, 2021). Therefore, the pandemic may even prick up the unequal distribution of wealth, and this is a problem that deserves our attention.

COVID-19 Crash and Recovery https://www.morningstar.com/articles/1028407/in-long-history-of-market-crashes-coronavirus-crash-was-the-shortest

To conclude, consumer preference indicates the consumers’ choices to obtain maximum satisfaction while being indifferent to other items. During a recession, the consumers’ preference might shift to cheaper goods while against normal and luxurious goods. In other words, the demand for inferior goods will increase, while demand for normal and luxury goods may decrease. Meanwhile, the demand for luxury goods will decrease more because of its high elasticity. This effect might keep affecting the economy after the recession because the disposable income of residents may drop in the post-recession era, and the way to guarantee life quality is increasing saving accounts.

References:

Melitz, Marc J., and Stephen J. Redding. Handbook of International Economics, 2014, p. i., https://doi.org/10.1016/b978-0-444-54314-1.00013-6.

Zarnowitz, Victor. Business Cycles: Theory, History, Indicators and Forecasting. University of Chicago Press, 1992.

Tappe, Anneken. “The COVID Recession Is Officially over, and It Was the Shortest on Record.” CNN, Cable News Network, 19 July 2021, https://www.cnn.com/2021/07/19/economy/recession-end-covid-nber/index.html.

D’Arpizio, Claudia, and Federica Levato. “Covid-19 Crisis Pushes Luxury to Sharpest Fall Ever but Catalyses Industry’s Ability to Transform.” Bain, https://www.bain.com/about/media-center/press-releases/2020/covid_19_crisis_pushes_luxury_to_sharpest_fall_ever_but_catalyses_industrys_ability_to_transform/.

Statista Research Department, “Value of the Global Luxury Goods Market 2020.” Statista, 30 Nov. 2021, https://www.statista.com/statistics/266503/value-of-the-personal-luxury-goods-market-worldwide/.

Published by N. Sönnichsen, “U.S. Natural Gas Consumption 2020.” Statista, 21 June 2021, https://www.statista.com/statistics/184329/energy-consumption-from-natural-gas-in-the-us-from-1995/.

Alves, Bruna. “U.S. Electricity Consumption 2020.” Statista, 6 July 2021, https://www.statista.com/statistics/201794/us-electricity-consumption-since-1975/.

POWER. “Recession Reduces Demand for Electricity.” POWER Magazine, 1 June 2009, https://www.powermag.com/recession-reduces-demand-for-electricity/.

Wunsch, Nils-Gerrit. “Instant Noodle Demand Worldwide, 2020.” Statista, 23 Dec. 2021, https://www.statista.com/statistics/606939/instant-noodle-demand-worldwide/.

Bernstein, Jared. “What Happens to Family Income in a Recession?” Economic Policy Institute, https://www.epi.org/publication/webfeatures_snapshots_archive_11072001/. _

“North America Instant Noodles Market: Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021–2026.” IMARC, Industry Trends and Forecast 2021–2026, https://www.imarcgroup.com/north-america-instant-noodles-market.

Pistaferri, Luigi. Why Has Consumption Remained … — Stanford University. Oct. 2016, https://www.web.stanford.edu/~pista/slow_cons_oct23.pdf.

Ma, Yihan. “China: Luxury Goods Consumption 2011–2021.” Statista, 18 Oct. 2021, https://www.statista.com/statistics/808235/china-luxury-goods-consumption/.

World Bank Group. “中国经济简报 — 2021年12月.” World Bank, World Bank Group, 21 Dec. 2021, https://www.shihang.org/zh/country/china/publication/china-economic-update-december-2021.

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Andrew Chen

Undergraduate student / Research assistant/ Always curious / Opinions are mine

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