November 13, 2006
The Deloitte Research Leading Index of Consumer Spending increased this month as real wages rose and initial unemployment claims showed a large decline.
"The first rise in real hourly earnings in more than two years—as a result of falling energy prices—along with a sharp fall in initial unemployment claims, are good signs for consumers and the economy," says Carl Steidtmann, chief economist with Deloitte Research and author of the monthly index. "Housing market values continue to be a question, but energy prices continue to show downward momentum and consumer purchasing power continues to improve. Going forward, mild weather could accelerate that improvement."
The index, comprising four components—tax burden, initial unemployment claims, real wages and real home prices—came in at 3.14 percent, up from a downwardly revised gain of 2.98 percent a month ago.
"Deloitte’s 21st Annual Holiday Survey of retail spending and trends showed that consumers are bullish about the economy. They feel secure about their jobs, they expect the economy to improve and they don't expect recent changes in the market value of their homes to impact their holiday spending," added Pat Conroy, vice chairman and national managing principal of Deloitte's Consumer Business practice. "It's up to the retailers to capitalize on this environment. We believe that the successful retailers this holiday season will respond to consumers' needs for straightforward store navigation, superior customer service and a seamless, brand-building multi-channel experience."
Deloitte’s Consumer Business practice expects that holiday sales, excluding autos and gasoline, will increase 7 percent during the November-to-January period, less than last year’s exceptional 7.8 percent increase, but still above the past decade’s average growth rate.
Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:
Tax burden: Personal income tax burden continues to rise slowly and is up more than 1.0 percent of income from a year ago. Faster growth and higher incomes push more households into higher tax brackets and expose more households to the alternative minimum tax.
Initial unemployment claims: Unemployment claims are down from a year ago when the ill-effects of Hurricane Katrina roiled the U.S. labor market. Since last fall, claims have steadily moved lower as the labor market tightens and employers seek to hold on to their existing work force.
Real wages: For the first time in two years, real wages rebounded sharply this month as falling energy prices gave a much needed boost to consumer spending power. With energy prices expected to continue to fall, the rise in real wages should be sustainable for the rest of the year.
Real home prices: Real home prices fell sharply in the most recent month as home builders moved to clear out excess inventories. While the decline in home prices is probably not over, the severity of the decline should moderate. Builder sentiment has stabilized and applications for new mortgages have picked up. With inflation down, mortgage rates have fallen putting a floor under the housing market.
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