Taxes Cut into Consumer Spending

October 20, 2010

The Deloitte Consumer Spending Index fell 6.6% in September 2010 compared with August 2010, due to what Deloitte identifies as a climbing tax burden and continued weakness in the housing market. The Index attempts to track consumer cash flow as an indicator of future consumer spending.

Index Falls to 4.5%
The Index, comprising four components: tax burden, initial unemployment claims, real wages and real home prices, fell from a revised 4.8% in August 2010 to 4.5% in September 2010. The Index previously stayed flat in August, following three straight months of declines.


In contrast, in April 2010, the Index rose from a revised score of 4.64% to 5.15%, a healthy 11.1% increase. The previous month, the Index rose an also impressive 10.2%, from a score of 4.21%.

Tax Burden Increases, Remains Low
Looking in more detail at the four main components of the Index, the still-low tax burden has started rising while foreclosures stagnate housing prices:

  • Tax Burden: The tax burden is moving up slowly. The average tax burden has moved off its lowest level in 40 years, and while still low by historical comparisons, is clearly headed higher.
  • Initial Unemployment Claims: Claims ticked up in the most recent month. Claims have been stuck in a narrow range for nearly a year.
  • Real Wages: Real wage growth, which had been the biggest contributor to the Index, has seen slower growth from a year ago as high unemployment keeps a lid on wages, while energy prices are pushing up the price level and hurting the real purchasing power of modest wage growth.
  • Real Home Prices: The housing market deteriorated in the most recent month, as the effects from the expiration of the home buyer credit take hold. Mortgage applications are down, sales activity is slow. Home foreclosures are still very high, creating a lot of excess supply which is depressing prices.

Despite recent stagnant results, the Index still remains at one of its highest levels in the past six years. Alison Paul, vice chairman and Deloitte’s retail leader in the US, said consumers remain discerning shoppers, but have been delaying purchases for a while. “Retailers can capitalize on any pent-up demand by delivering a compelling merchandise and value message to entice the consumer who is ready to replenish or even splurge this holiday season,” said Paul.

Consumers Don’t See Near-Term Financial Change
Overall, recent Harris Poll results show that consumers in general do not expect dramatic change to their household’s financial condition in the next six months. Twenty-two percent of consumers think it will get better and 28% think it will get worse, with 50% thinking it will remain the same. And of consumers expecting their household’s financial condition to get better or worse, most expect there to be only a little change, rather than a lot.

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