Leading Index of Consumer Spending - December 2005
Holiday sales off to a good start; longer-term mixed message for consumers and retailers
December 14, 2005
By Carl Steidtmann, chief economist and director, Consumer Business, Deloitte Research
The latest Deloitte Research Leading Index of Consumer Spending forecasts a mixed message for consumers and retailers. By most accounts, holiday sales got off to a good start over the Thanksgiving weekend. During the month, we saw a small increase in real consumer spending and chain store sales were in line with expectations. In addition to early holiday promotional activity, we’re seeing a rebound from the short-term negative effects of Hurricane Katrina: unemployment is down, affected businesses are now operating again and construction in the Southeast has begun. At the same time, sales of durable goods continue to suffer, particularly in the automobile sector.
The Index also shows a decline in real home prices, lower energy prices and increased consumer confidence.
“The short-term signs are positive; however, longer term we believe that retailers and consumers continue to face fundamental challenges,” says Pat Conroy, vice chairman and national managing principal of Deloitte’s Consumer Business practice. “There is still substantial pressure on retailers to promote heavily, but they should be selective and targeted in their campaigns, and focus on products and categories that aren’t selling well, or that complement products or services that have higher margins. Retailers should also continue to focus efforts around attracting “baby boom buyers” who have more discretionary income to spend this holiday season. In addition, the holiday shopping season is now extending into January with the redemption of gift cards. Retailers will be well served by launching gift card redemption campaigns. As an added bonus, our research has shown that gift cards are often used to buy full-price merchandise, leading to higher margins for retailers.”
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 burden continues to rise, and federal personal tax revenues were up sharply in October, rising 1.3 percent from September. The growth in tax revenue has been particularly strong at the state and local level, where numerous tax increases have offset some of the tax reduction going on at the federal level.
Initial unemployment claims rose sharply in the aftermath of Hurricanes Rita and Katrina. That was a temporary hit to the labor market that has already reversed itself. Claims fell in the most recent month. The recent sharp rise in consumer confidence points to further improvement in the labor market.
Real hourly wages continue to decline as sharply higher energy costs are undercutting consumer purchasing power. Real wages have been declining since the middle of 2004 and are now down 1.7 percent from a year ago.
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 unchanged from a year ago. New home sales showed surprising strength in October; however, higher interest rates point to continued weakness in the housing market. Inventories of unsold houses continue to rise, putting downward pressure on prices.
The index, comprising four components – tax burden, initial unemployment claims, real wages and real home prices – fell in November to 2.73 percent, from an upwardly revised gain of 3.31 percent in September.
Based in New York,Carl Steidtmannis 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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The latest Deloitte Research Leading Index of Consumer Spending forecasts a mixed message for consumers and retailers. By most accounts, holiday sales got off to a good start over the Thanksgiving weekend. During the month, we saw a small increase in real consumer spending and chain store sales were in line with expectations. In addition to early holiday promotional activity, we’re seeing a rebound from the short-term negative effects of Hurricane Katrina: unemployment is down, affected businesses are now operating again and construction in the Southeast has begun. At the same time, sales of durable goods continue to suffer, particularly in the automobile sector.
