Jobs, Housing Flatten Consumer Spending

September 28, 2010

The Deloitte Consumer Spending Index remained unchanged in August 2010 compared with July 2010, with a lack of improvement due primarily to housing and unemployment. The Index attempts to track consumer cash flow as an indicator of future consumer spending.

Flat Performance Follows 3 Straight Declines
The Index, comprising four components: tax burden, initial unemployment claims, real wages and real home prices, remained at 4.73%, steady with the previous month. The Index previously dropped from an upwardly revised score of 4.63% in June 2010 to 4.45% in July 2010, a 3.9% decline. This reflects a moderate improvement from the declines of the previous two months. In June 2010, the index fell from its May reading of 4.93%, a 6% drop. In May 2010, the Index fell from 5.15%, a 4.3% drop.

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In contrast, in April 2010, the Index rose from a revised score of 4.64%, a healthy 11.1% increase. The previous month, the Index rose an also impressive 10.21%, from a score of 4.21%.

Despite recent stagnant results, the Index still remains at one of its highest levels in the past six years. Deloitte analysis indicates softness in housing prices and rising unemployment claims in August were offset by tax rates that remain low and rising real wages due to weak inflation.

Alison Paul, vice chairman and Deloitte’s retail leader in the US, said consumers are sticking to basic purchases rather than spending cash reserves. “This scenario will test retailers’ creativity and ability to drum up some excitement for consumers,” said Paul. “Retailers need to draw customers off the sidelines with promotions and merchandising that are relevant and unique to increase conversion rates.”

Tax Burden May Increase
Looking in more detail at the four main components of the Index, the currently low tax burden is in danger of rising:

  • Tax Burden: While the tax burden has moved off of its historic lows set last winter, it is still well below year-ago levels and continues to be a major source of household cash flow improvement. With the tax benefits of the 2009 stimulus ebbing and the expiration of former President George W. Bush’s 2001 tax cuts pending, the tax burden could push higher.
  • Initial Unemployment Claims: Initial unemployment claims have come down sharply from a year ago but have plateaued since the first of the year.
  • Real Wages: Real wage growth continues to make a small contribution to household cash flow due in large part to very weak inflation. For workers who are employed, earnings go a lot farther than they once did.
  • Real Home Prices: While home sales received a boost from the tax credit, home prices are still very weak. With the tax credit now lapsed, home prices are expected to drop further.

Spending Keeps Slowing
The Consumer Reports Past 30-Day Retail Index for September, reflective of August 2010 activity, is at 9.8, down from the prior month (11.4). Per capita spending for the past 30 days was down significantly for September, reflecting August activity, to $185, from $286 the prior month.

Meanwhile, the Consumer Reports Next 30-Day Retail Index, reflective of planned purchases for September, is at 7.6, down from the prior month (8.1) as well as one year ago (8.8).

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