Study: Consumer Spending Index turns negative

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Study: Consumer Spending Index turns negative

November 17, 2008

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New York--Substantial increases in unemployment claims and a continued weakness in the housing market in October caused the Deloitte Research Leading Index of Consumer Spending to produce a negative reading for the first time since October 1980.

The Index, which attempts to track consumer cash flow as an indicator of future consumer spending, has fallen 1.75 percent in the past three months, the sharpest deceleration in the Index since October 1990.

"While home prices declined at a slower rate during the summer, fall has seen the pace pick up again. Home prices are now down over 13 percent in real terms from a year ago, and they are the biggest drag on the Index and on consumer spending," said Carl Steidtmann, chief economist with Deloitte Research, a subsidiary of Deloitte Services LP, and author of the monthly Index. "The deterioration in the labor market is also a key concern, with initial unemployment claims rising sharply in October."

On the positive side, Steidtmann said, real wage gains got a boost in October from a fall in energy prices, and energy prices continue to go lower.

The Deloitte Research Leading Index of Consumer Spending comprises four components: tax burden, initial unemployment claims, real wages and real home prices, which fell to -0.10 percent from a revised gain of 0.54 percent a month ago.

Highlights of the Index include:

--Tax burden: The tax burden continues to fall with the weakening of the economy.

--Initial unemployment claims: Claims shot up in October and are now up 51 percent from a year ago.

--Real wages: Real wage growth rebounded in October due to falling energy prices. However, real wages are still down 2 percent from a year ago.

--Real home prices: House prices decreased by 13.4 percent in October. Home mortgage refinancing has all but disappeared, reducing household cash flow. Inventories of unsold homes, while down slightly, are still high. A contraction in mortgage credit is limiting home buying. Until home prices stabilize, housing will remain a major drag on consumer spending.

"Given the credit crunch and the impact it's having, retailers need a strong focus on cash flow management this holiday season," Deloitte LLP Vice Chairman and U.S. Retail Leader Stacy Janiak said in a media release. "At the same time, it's important to have a strategy and stick with it. While it's tempting to match or beat competitors' aggressive promotions, that approach can exact a heavy toll on profits. Retailers should be very strategic in making changes to their planned holiday promotions to limit the adverse margin impact as much as possible. Cost containment and labor management should also remain top of mind."

For more information about Deloitte's Retail sector, visits its Web site, Deloitte.com/US/Retail.

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