NEW YORK — Just one week into the new year and already there are mixed perceptions about the state of consumer spending.
Will consumers continue their free-spending ways, buying everything their hearts’ desire? Or will they snip the purse strings in favor of savings, and pull back on some purchases? The outcome depends on which economist you ask.
Data from Deloitte Research’s Leading Index of Consumer Spending suggest shoppers could feel pressured in 2005 to spend less.
The latest Deloitte Index report, reflecting in part the sharp decline in home prices last month, indicate “lost momentum after the recent upturn in consumer spending during the 2004 holiday season.” The Index fell in December after two consecutive months of growth, signaling a potential decline in consumer purchasing power. Comprising four components — tax burden, initial unemployment claims, real wages and real home prices — the Index declined to 4.5 percent from a downwardly revised gain of 5.1 percent in November.
According to Deloitte’s findings, the strength of consumer spending levels will depend on housing prices, real wages and employment growth. The Index measures consumer cash flow as an indicator of future consumer spending.
“If the housing market has peaked, consumer cash flow will dry up, putting a lid on future consumer spending. However, if the recent weakness in housing prices is a one-month phenomenon, or a passing anomaly in the data, consumer spending will remain on solid ground,” observed Carl Steidtmann, Deloitte’s chief economist.
With the economic environment expected to remain volatile throughout the year, Steidtmann cautioned retailers to maintain a “tight grip on inventories, new store openings and hiring.”
One area that could buttress future spending by consumers is the labor market. Stronger employment growth is needed in 2005 to sustain household cash flow, Deloitte’s data indicated. However, just how strong the labor markets will be this year is still debatable. Last year, many economists struggled over why job growth was lackluster when employment levels should have gained ground because the U.S. economy was supposedly showing gains.
On Friday, U.S. stock trading was mixed following a report from the Labor Department that U.S. nonfarm payrolls grew by a seasonally adjusted 157,000 in December. Economists were generally expecting a gain of 175,000. The unemployment rate, however, remained steady at 5.4 percent.
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