Deloitte Consumer Spending Index Continues Downward

The Deloitte Consumer Spending Index declined again in May, driven downward primarily by the housing market. The Index attempts to track consumer cash flow as an indicator of future consumer spending.

"The year over year pace of decline in real consumer spending appears to have stabilized, however, recovery is being delayed by a sharp increase in consumer savings, which has risen to 5.7 percent from zero a year ago," said Carl Steidtmann, chief economist with Deloitte Research, a subsidiary of Deloitte Services LP, and author of the monthly Index. "However, the weakness in the Index was driven almost entirely by falling home prices, which are down nearly 14 percent over the past year, undermining small gains in real wages, a declining tax burden and current stabilization in new unemployment claims."

The Index, comprising four components -- tax burden, initial unemployment claims, real wages and real home prices -- fell to 1.35 percent from an downwardly revised gain of 1.44 percent a month ago.

"The lack of improvement in the index suggests that consumers are still feeling the pressures of the economy," said Stacy Janiak, vice chairman and U.S. Retail leader, Deloitte LLP. "Additionally, even when a recovery takes hold and spending strengthens, consumers will likely remain focused on value. Retailers should consider strategies that strike a connection with customers looking to keep expenditures down without trading down. That might mean expanding or reinventing a private label brand in a way that not only offers the right price point, but a certain amount of cache as well."

Highlights of the Index include:

Tax Burden: The tax burden continues to fall with the weakening of the economy. The tax burden is at a level only seen on a few occasions over the past 50 years during brief periods following tax rebates. Continued decline is expected.

Initial Unemployment Claims: Claims appear to have stabilized for the moment and in recent weeks have come down. While still at very elevated levels, the future direction of claims remains uncertain given sizable layoffs that are expected from the auto and auto dealer sectors of the economy.

Real Wages: Real wage growth continues to post small gains due in large part to falling prices for energy. Real wages are up 4.3 percent from a year ago and on an annualized basis are up 8.0 percent over the last nine months as energy prices have given a big boost to consumer purchasing power.

Real Home Prices: Home prices continue to fall. Renewed efforts to forestall foreclosures coupled with a tax credit for home buyers may bring some stability to this market. The decline in home prices has made home buying much more affordable. What is lacking is mortgage financing and stable prices.

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