Improving Housing Data Sends Deloitte Consumer Spending Index Up

June 21, 2012 /

In May, the Deloitte Consumer Spending Index posted its first three-month increase since September 2010, driven by a continued slowdown in the fall of new home prices.

The Index tracks consumer cash flow as an indicator of future consumer spending.

“The Index’s increase is due to an ongoing slowdown in declining new home prices, plus a small uptick in real wages as falling energy prices give consumers some relief,” explains Carl Steidtmann, Deloitte’s chief economist and author of the monthly Index. “If these two components continue in this direction, consumer spending and sentiment may gain ground. However, the outcome of the stalling job market and economic crises overseas will determine whether it can be sustained.”

Housing prices are currently stable and in many markets are turning up. Should prices remain steady, demand may return. Pending sales of existing homes were down 5.1 percent in April from March, possibly because the unseasonably warm winter improved sales.

In recent weeks, oil prices fell more than $20 a barrel and gasoline prices will follow, giving consumers more purchasing power. One concern is that falling energy prices can also reflect a weakening economy, like the Fall of 2008.

Three consecutive monthly employment reports were disappointing. Jobless claims are trending up and layoff announcements are up sharply as well. If the labor market continues to deteriorate, the recent improvement in the Index will quickly reverse.

Last March, the Index dipped due to spiraling home prices. Deloitte previously predicted that the continued downward pattern in the consumer spending will face additional economic headwinds in 2012.

After posting significant gains early in the year, auto sales have weakened — even in comparison to a period when sales depressed by lack of supply from Japan. Sales in May fell sharply from April. At 13.78 million units on an annualized basis, sales in May were well below the peak sales rate of 15 million units achieved in February, and it is likely that the May numbers — due out in mid-June — will also be weak.

The Index, which comprises four components — tax burden, initial unemployment claims, real wages and real home prices — rose to 2.96 from an upwardly revised reading of 2.42 the previous month.

“Though confidence is still fragile, the consumer’s mood may improve as they begin to see their housing concerns recede and gas prices fall,” said Alison Paul, vice chairman, Deloitte LLP and retail & distribution sector leader. “Retailers need to capitalize on this timing and step up efforts to clear inventory before the back-to-school season starts. Smart retailers are using consumer insights and advanced analytics to sharpen price points and better predict buying behavior. By doing this, retailers are more likely to move over-inventoried goods while holding margins on the items that shoppers want.”

The tax burden ticked up this month to 11.11 percent as the tax refund season passed. The decline in claims has reversed, putting claims at 384,250. With no material increase in jobless claims and a pickup in announced layoffs, this indicator may move further into negative territory in the future. Energy prices have changed direction, giving a small boost to real wages, putting average hourly earnings at $8.72. Prices have stabilized and are turning up, rising 2.54 percent from last year.

 

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