Wages, Housing Hit Spending

July 20, 2010

The Deloitte Consumer Spending Index declined in June 2010 for the second consecutive month, once again due to weakness in real wages and the housing market. This two-month slide follows a two-month string of gains caused by an improving US employment picture.

The Index, which attempts to track consumer cash flow as an indicator of future consumer spending, dropped from an upwardly revised score of 4.93% in May 2010 to 4.5% in June 2010, an 8.7% decline. In May 2010, the Index fell from 5.15%, a 4.3% drop.


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 its June 2010 decline, the Index still remains at one of its highest levels in the past six years. Real hourly earnings, after experiencing growth in 2009, have deteriorated in 2010 and continue to drag on the Index. The other negative contributor appears in real home prices, which resumed their downward trend in May 2010 after a short, two-month upward climb.

However, on the positive side, initial unemployment claims subsided for the sixth straight month in June 2010, and the tax burden remains at historically low levels, although upcoming tax legislation may push it higher.

Alison Paul, vice chairman and Deloitte’s retail leader in the US, said retailer should focus on converting customers into buyers during the upcoming back-to-school season. “Consumers may monitor prices and resist impulse buys should they continue to act cautiously,” said Paul. “Retailers that can entice shoppers by pulling the right customer conversion levers and provide a helpful and exciting cross-channel shopping experience may be better positioned to lead the pack this back-to-school season.”

Employment Gains May Soften
The Index comprises four components ? tax burden, initial unemployment claims, real wages and real home prices.

Initial Unemployment Claims: As the employment cycle continues to improve, unemployment claims continue to fall. Although employment gains recently have softened a bit, claims are expected to continue to move downward, though perhaps at a somewhat slower pace.

Real Wages: Real hourly earnings slipped for the fifth consecutive month. With increasing signs that economic growth is softening, real wages could stagnate for a while longer.

Real Home Prices: Home sales quickly fell back with the ending of the homebuyer tax credit. As a result, home prices have also deteriorated and will likely remain soft for several more months. Thus, real home prices may remain a drag on the Index for a while longer.

Tax Burden: The consumer’s tax burden declined sharply through most of the recession. In 2010, however, the rate has basically held steady. It remains at an historically low level.

Recession Hits American Jobs, Homes
More than half (55%) of US adults have felt some type of negative work-related impact from what is generally seen as the ongoing “Great Recession,” according to data from the Pew Research Center.

About one-third (32%) of adults in the labor force have been unemployed for a period of time during the recession, generally considered to have begun in December 2007. Another 6% have been underemployed, meaning they want full-time employment but cannot find it due to economic reasons.

In addition, about half of all homeowners (48%) say the value of their home has declined during the recession. Of those who say this, nearly half (47%) believe it will take three to five years for the value to return to pre-recession levels, and nearly four in 10 (39%) expect it will take six years or longer. Yet the vast majority (80%) of Americans say that owning a house is the best long-term investment a person can make.

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