Leading Index of Consumer Spending - Automotive Retail - Employment - Tax - Oil Prices

November 14th 2005

By Carl Steidtmann, chief economist and director, Consumer Business, Deloitte Research

Continuing effects of Hurricanes Katrina and Rita, high heating oil prices, an increasing tax burden, and a slow-down in the growth of housing prices continue to present challenges for retailers and consumers, according to Deloitte Research's Leading Index of Consumer Spending.

Real consumer spending is falling, but this month's chain store sales figures were quite positive. It appears that the auto dealers are taking the brunt of the impact, as consumers respond to rising energy costs by altering their purchasing preferences and turning toward more fuel-efficient models. In addition, successful spring and summer car-maker promotions have negatively affected fall sales.

Initial unemployment claims have increased substantially, due largely to the economic disruption of Hurricanes Katrina and Rita, but that is expected to be a temporary effect. In addition, energy prices, while still high, have come down substantially over the past several weeks.

"Given the uncertainty surrounding some of these indicators, retailers can't take anything for granted and will want to remain nimble over the coming weeks and months," says Pat Conroy, vice chairman and national managing principal of Deloitte's Consumer Business practice. "Retailers will need to be cognizant of who their customers are and what they want in order to convert shoppers into buyers. They should creatively promote, have an emphasis on convenience, and selectively target seasonal hiring to respond to consumers' demands for superb customer service and ample sales help."

Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:

General Merchandise, Apparel and Furniture (GAFO) sales growth is expected to be 4 to 4.5 percent for the holiday season.
Personal income tax levels continue to rise slowly, with federal tax revenues up 14.6 percent so far this fiscal year. Faster growth and higher incomes push more households into higher tax brackets and expose more households to the alternative minimum tax.
Initial unemployment claims have increased in the wake of Hurricanes Katrina and Rita and account for most of the deterioration in the index this month. The loss of employment due to the destruction in the Gulf has temporarily depressed household cash flow. As the rebuilding process shifts into higher gear, this loss of employment is expected to be reversed.
Real hourly wages continue to decline as higher energy costs are undercutting consumer purchasing power. Short term deterioration in the labor market will be a barrier to future real wage growth. In recent weeks, energy prices have come down. If that pattern continues, lower energy prices could give a boost to consumer purchasing power next year.
Continued high-energy prices are likely to negatively affect consumer spending, particularly for lower income households.
Rising home values have been a great source of cash flow for consumers. Real home prices fell again in the most recent month and are down from a year ago. After posting large gains last year, real home prices have slowed sharply throughout 2005. The weakness in home prices is the biggest single factor in the slowdown in the Deloitte Index this year.

The index, comprising four components -- tax burden, initial unemployment claims, real wages and real home prices -- fell in October to 2.98 percent, from a downwardly revised gain of 3.57 percent in September.

Based in New York, Carl Steidtmann is Deloitte Research's chief economist and a director of Consumer Business Research. In 2003 Dr. Steidtmann was selected as one of the 25 most influential consultants by Consulting Magazine for his work in consumer spending forecasting. He earned his Ph.D., master's and bachelor's degrees from the University of Colorado.

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