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The answer is volatility. Volatility has made a comeback as the backdrop to everyday life. A chart in a post in yesterday’s Wall Street Journal Real Time Economics blog provided a clear picture of the economic volatility now roiling consumers. It plots the average daily movement in the Dow Jones index of US stocks back to the mid-1980s. The return of stock market volatility is evident throughout the mid-2000s. It really takes off after the economic meltdown of late 2008 and only gets worse. By the measure shown in this chart, last month, August 2011, was the 10th most volatile month in the past 75 years.

Coupled with roller-coaster prices for oil, food and other commodities, the currency and debt risks plaguing many developed economies, and worries that important developing markets like China and Brazil are bubbles waiting to burst, it is no surprise that many experts, and consumers, too, have come to feel that volatility is the new normal.

The everyday experience of volatility is more than financial, though. Suddenly, life as a whole seems more erratic, more fragile, and even more menacing in the face of ominous volatile lows. Such dread was heard as Hurricane Irene churned up the East Coast, hard on the heels of record summer heat, a rare earthquake in the mid-Atlantic states the week before, and two winters of record snowfall. With the storm approaching, people were tweeting and repeating the same refrain, “What’s next? Locusts?” (Prominent media figures did it no less than ordinary people. Katie Couric tweeted this refrain; Brian Williams repeated it on the NBC evening news.)

The August 2011 jobs report for the US registered zero growth, the first such stall since 1945. A large swath of middle-class Americans fall into the half considered “financially fragile” because, short of extreme measures, they cannot come up with $2,000 in 30 days to cover an unexpected emergency expense.

The financial frailty of the middle class aggravates the feeling that life has become ever more volatile and

capricious. With much of the middle class sapped of buying power and teetering a mere rainy day from financial ruin, consumers are hunkering down. Remedial governmental actions have been stymied by a paralyzing political stalemate. All the while, emerging economies like China, India and Brazil are nervously eyeing the sagging fortunes of developed markets, the US in particular, to see if their exports will continue to find buyers.

Of course, life has never been free of ups and downs. But before the economic upheaval of 2008 it was widely believed that volatility of the sort now worrying people had been tamed, particularly in the realm of macroeconomics. The best-known expression of this belief came from Ben Bernanke (then a Federal Reserve Governor, now Chairman) in a 2004 speech in which he summed up the consensus opinion of economists by famously characterizing the preceding 20-year-plus period as the Great Moderation.

Perhaps the biggest impact of the Great Moderation was the moderating, confidence-inspiring context it provided for everything else. After all, it’s not as if the two-plus decades of the Great Moderation were free of worrisome events. Yet, as challenging as it was, this period was met with an underlying sense of confidence that solutions were at hand. This was exemplified by the resilience and stability of the global economy, something that leading economists believed modern economic theory, known colloquially as the Washington Consensus, had engineered to last.

With volatility amped up, consumers now feel much more vulnerable and are acting accordingly. Marketers will find a much more vigilant consumer in the marketplace. Vulnerable consumers are on the lookout for products and services that address their need for vigilance. Going forward, the whole pyramid of engaging consumers about higher-order (premium-priced) needs will require a firmer foundation in security.

This week’s question: “What is the one thing unnerving my customers the most these days?”

September 6, 2011

Yankelovich

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