By  on January 10, 2005

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.Based on data from Retail Forward’s Future Spending Index for January, consumers are expected to spend at a stronger pace in the first month of the new year. Retail Forward’s Index rose to 104.9, the highest level in six months, from 98.7 in December.

“This month’s results show that the late-holiday shopping momentum should extend into the new year,” observed Steve Spiwak, economist at Retail Forward. He added that “rising incomes, the year-end spurt in the stock market, gift cards and generous discounts are stoking spending plans this month.”

Retail Forward also tracks spending by households based on annual income. The index for Up Market Households, those with incomes greater than $75,000, surged in January to its best showing since April to 105.4 from 89.9 in December. The stock market bounce in November and December and upmarket buying fed the increase, Retail Forward said. This group of households was most optimistic about jobs and incomes.

The future spending index for Down Market households (incomes less than $22,000) rebounded from October’s low, indicating a rise in optimism over near-term spending plans. The index for the Down Market for January registered at 105.5 from 103.7 last month. This household group, however, continues to have worries about job security as well as heavier credit card debt loads.

The index for the middle group, or Middle Market households, registered 104.2, near its highest levels in six months. This group has annual income of between $22,500 and $75,000, and strength in home buying offset wariness over availability of jobs and heightened concerns about credit card debt.

While there is high expectations that consumers won’t change their spending habits anytime soon, there’s also an indication that many are walking around with gift cards burning holes in their pockets.

Retail Forward concluded from its latest monthly survey that consumers received an average of 2.5 gift cards-certificates per household this past holiday season, and that they purchased nearly the same number of cards to give as gifts. Down Market households received more gift cards than they purchased, while Up Market households purchased more to give as gifts than they received. In addition, Wal-Mart is expected to gain the most from an increase in spending this month, particularly from those in the Down Market households using their gift cards.Kathleen Camilli, president of Camilli Economics, who spoke Thursday at the New York Society of Security Analysts’ Semi-Annual Market Forecast luncheon, was optimistic over consumer spending.

“I don’t have the dismal view of consumers as most [others],” she said. “The wealth impact will kick in, and people will start to spend on higher levels of wealth.”

Most economists are pegging gross domestic product to experience a steady growth rate of 3 to 4 percent, which could keep spending levels up.

Camilli is forecasting 4.5 to 5 percent GDP growth in 2005, higher than many of her colleagues. She also sees “inventory building in 2005. Companies were ramping up in 2004, and will continue in 2005,” she said.

Kari Bayer Pinkernell, director and senior U.S. strategist at Merrill Lynch & Co. who spoke at the same program, observed that the stock markets have shown what she referred to as a “post-election relief rally,” with energy prices dropping from $55 a barrel before the election to its current $45 a barrel price tag. She cautioned that it is too soon to predict what 2005 will be like based on just one week’s trading patterns. She noted that Federal Reserve chairman Alan Greenspan is “more hawkish, taking some numbers down” in regard to slowing growth this year.

Another concern was raised by Arnie Berman, Global Capital Markets Strategist at CreditSights Inc., who noted, “We exited 2004 with inflation [worries] muted. Now there’s a greater concern regarding inflation.”

Yet Berman also believes that, while many investors will sit on the sidelines for a period due to perceived market uncertainty, there’s a strong likelihood that the trends will be favorable for 2005, which would be music to retailers’ ears every time consumers open their pocketbooks.

Retail Forward's Future Spending Index Jumps

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