September 20th 2005

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

The damage caused by Hurricane Katrina, coupled with higher gas prices, is expected to contribute to an increasingly difficult outlook for certain retailers in the U.S. as the holiday season approaches, according to Deloitte Research's Leading Index of Consumer Spending.  Amidst weakening home prices, a rising tax burden and slow job growth, rising inflation and Katrina could trigger heightened challenges for consumer spending in the U.S. through the end of 2005.

Retailers face hurdles in the coming months. A natural disaster of this magnitude will almost certainly have a negative impact on consumer spending in the short run, and will likely hurt some retail segments during the upcoming holiday season.

However, we can anticipate an upturn in consumer spending in communities to which storm victims are migrating, such as Houston and Baton Rouge. As rebuilding efforts begin, we should see a boost in sales of home-related goods and building materials, as well as basic clothing and kitchen goods.

“With the current level of uncertainty surrounding the consumer’s ability to spend, retailers need to continue to be vigilant about their inventory levels, costs, and effective promotional strategies,” said Pat Conroy, vice chairman and national managing principal of Deloitte’s Consumer Business practice.  “They must also increase their focus on converting consumers they have attracted into their stores into buyers.  Finding better ways to positively impact these conversion rates will be a critical element to retailers’ success this upcoming season.”

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

• Federal, state and local tax revenues are rising and will continue to climb outside of the hurricane-ravaged Gulf region.  However, it may not be enough to keep deficit estimates falling given likely substantial government spending on disaster relief. 
• Initial unemployment claims fell slightly in August and are still below 2004 levels.  The temporary loss of employment in the Gulf region will reduce overall job growth in the short run. 
• Real wages continue to decline at a slow pace.  The sharp rise in gasoline and home heating prices will hurt consumer purchasing power in the fall and winter months ahead.
• Real new home prices fell again in the month of July and are down slightly from 2004 levels.  After posting large gains last year, real home prices have slowed sharply, contributing significantly to the slowdown in the Deloitte Research index. 

The index, comprising four components -- tax burden, initial unemployment claims, real wages and real home prices – fell in August to 3.79 percent, from an upwardly revised 3.86 percent in July.

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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