Consumer's Blissful Antidote for Manufacturers Depression

Are the global markets going down the tube and consumers just oh-so-blind and spending like it's 2007, or are the financial headlines simply media panic-attacks and consumers wise enough to spend within their means?

One of my favorite TV shows as a kid was 'Soap' with Billy Crystal. It opened with highlights from previous episodes and a voice-over describing disorderly events concluding with the line "Confused? You won't be after this episode of Soap," which of course ended with more pandemonium.

In the current episode of diamond trading, diamond traders are very anxious, sure that there is very little wholesale business because consumers are not buying. This at a time when stock markets are falling, consumer confidence is low, new jobs aren’t being created, Europe is teetering on the brink of an economic calamity, and even gold is not as attractive anymore.

In stark contrast, media and government reports claim that diamond jewelry sales are increasing in the U.S., Japan and China, the three largest markets.

Can these two statements be reconciled? Are consumers really buying, and if so, are they blissfully ignorant about the economic reality? Here is the logic: Banks are in trouble and cautiously lending, yet some consumers are less cautious and spending. As Harry Winston CEO Bob Gannicott puts it, "the credit crisis of 2008/9 was centered on consumer credit and the banks that were supporting it. This had a dramatic effect on the consumer. The current crisis is centered on sovereign debt and the largely European banks that are its holders, while consumer off-take remains resilient."

How come consumer surveys such as the Consumer Confidence Index are negative, yet diamond jewelry sales keep rising? Asking why the facts don’t fit the indicators is the wrong question. We should ask why the indicators don’t fit the facts.

When an American consumer is called by phone and asked about his economic mood, he tries to fit the answer to what he believes is the ‘right’ reply. Hearing about the macro-economic difficulties, he states the sentiment as negative. Even if that ‘should’ be the answer, that consumer’s behavior is different.

According to our latest data, since April, total U.S. jewelry sales registered double-digit growth every month, including a very strong 12.6 percent in August. At the same time, consumer credit balances rose by 5.9 percent at an annual rate through July. It appears that U.S. consumers are returning to their old reliance on credit to make their high-expense purchases. Hello debt…goodbye caution!

In other words, despite the negative sentiment and the real economic situation, consumers appear to be fed up with holding back. Like so many failed diets, if you see the goodies enough times, you tire of reminding yourself of the need for restraint. If the right occasion is there – a significant birthday or an anniversary – and the price lowered to a tempting new level, well then, no bonus or a static wage losing ground to the rising cost of living won't stand in the way of rewarding yourself for your previously responsible fiscal behavior.

After weeks of optimistic statements, last week we urged caution. The global economic outlook is negative, and that may last for a while. At the same time, consumers want, and can, buy diamond jewelry; therefore, businesses should act with caution, but dipped with some optimism.