Feb

17

Pent-up demand is an economic term not used that much in recent years but now see beginning to work its way into the vocabulary of business articles (as with WSJ story below).

My elementary-level sense of pent-up demand is that it is money that is currently being saved by the consumer in order to pay down existing credit card or loan debt or to counter the risk of job loss or to offset thoughts of an uncertain future (i.e. save it for a rainy day approach).

This money sitting on the sidelines will have to be spent at some point, however, to replace balding tires, leaking roofs, old TVs and appliances, moth-eaten clothes (those not considered fashionable, poor chic), and any other numerous material items subject to increasing entropy.

Perhaps there are a pent-up demand curves that have been forming that have different shapes depending on the consumer's ability to postpone taking care of the inevitable. At some point in time the curves overlap and herdish spending begins amongst the backdrop of low energy prices and government stimulus…possibly starting with the basic (for some a nice TV or new computer) necessities and then moving on to larger consumer purchases.

How long can you drive a clunker for instance? And if you do you are undoubtedly going to need to purchase parts? Sure you can drive a 10-yr old car but it is going to cost you to keep it running.

From the WSJ:

When the economy contracts by as much as it did in the fall, it means that consumers and businesses are forgoing spending that they might otherwise see as necessary purchases.

In a normal year, for example, about 5% of the cars, pickups and other light vehicles on the road are sold for scrap. With roughly 250 million light vehicles in the country, that means that just to keep up with the scrap rate, about a million new vehicles need to be sold each month. The last time more than a million light vehicles were sold in the U.S. was August, according to the Commerce Department. In January, just 655,200 vehicles were sold — the lowest number in the 33 years of the government data.

Mike Darrah, owner of Darrah's Automotive & Recycling in York, Pa., said the number of cars people have brought to him to scrap has fallen by 40% to 50% since September. "People are driving more clunkers," he said. "They don't have the money for a new car. They don't have the money to fix the clunkers. They're getting by on as little as they can."


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4 Comments so far

  1. jeff watson on February 17, 2009 7:50 am

    In Cuba, it's common to see US cars from the 50s on the road. The resourceful Cubans manage to keep those cars running without a reliable market for spare parts. One can only wonder if this administration lifts the embargo how long it will take for those cars to disappear.

    Jeff

  2. douglas roberts dimick on February 17, 2009 10:26 am

    Growing up on a farm, junk yards presented times of great adventure.

    You literally pry into peoples’ lives when rummaging among heaps looking for golden parts at dirt-cheap pricing. My first car, an MG Midget, was rebuilt with yard parts, as were subsequent Datsun Z, Triumph, Fiat, and other transport and sporting projects.

    Copp Motors in Cumberland, Maine was the Merrill of the area. It was run with little personality – all business. The Art of Conversion – junk to cash – was a well studied and seriously practiced art form. The Copp family appeared to live well, expanding into other financial endeavors over time.

    My grandparents and parents saved things, often recycling. One may like to eat at Mickey D’s now and then; it does not mean that the society and its markets are to become fast and disposable. Buffet or no buffet, values are fixed dishes that moreso constitutional than a la carte.

    Since the 1970’s, perhaps with the pervasion of television throughout first our politics (from Kennedy vs. Nixon) and then our markets (e.g., “When Merrill Lynch speaks, people listen” [and then lose money]), we may be said to have “evolved” from a society of markets to one of consumers. Somewhere in that reformulation of the American self, could we have lost quantitative equilibrium between production valuation(s) and materialist consumerism?

    Perhaps, given our “beyond our means” indulgences of the past few decades, a few years of getting “pent up” isn’t such a bad idea for the coming years? Visit the five continents; see how the rest of the world lives – or just ask Jim Rogers, since he has biked around the block twice.

    As for how long may one…?

    This year’s Christmas present to my sister from her husband was a 1971 Datsun 240Z with 66,000 miles… http://www.youtube.com/watch?v=UK7MAZj86LE

    You go girl…

    dr

    Ps. Bought my 1971 Z in 1979. Too much fun if there is such a thing.

  3. Brian Kuebler on February 17, 2009 6:41 pm

    Pent-up demand isn’t much use without pent-up cash–and there seems to be less of that all the time.

  4. Gary Rogan on February 17, 2009 9:47 pm

    You have to aggregate any pent-up demand, which in this case is just some extra savings for those who are lucky enough to be able to save something for the rainy day after being frightened and thinking that the rainy day is pretty much here, with the extra government borrowing and spending occurring at the same time. The small increase in private savings is more than likely to be overwhelmed with public borrowings resulting in the overall negative savings rate. Eventually these borrowings will have to be repaid either through inflation or by extracting the extra private savings through extra taxes.

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