Deloitte Consumer Spending Index Ends 2011 on a Low Note; 2012 Outlook Suggests Contraction in Incomes, Future Spending

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Jan 26, 2012, 08:48 ET

NEW YORK, Jan. 26, 2012 /PRNewswire/ -- Despite small improvements in three out of four components, the Deloitte Consumer Spending Index (Index) dipped slightly in December due to a decline in housing prices. The Index tracks consumer cash flow as an indicator of future consumer spending.

"Initial unemployment claims continued to decline in December, while real wages benefited from a decrease in energy prices," explained Carl Steidtmann, Deloitte's chief economist and author of the monthly Index. "This positive movement was not substantial enough to offset the continued pressure from the housing market, which has been the most significant drag on the Index for many months."

The Index, which comprises four components — tax burden, initial unemployment claims, real wages, and real home prices — fell to 1.86 from a reading of 1.93 the previous month.

"The New Year brings new demands on retailers," said Alison Paul, vice chairman and U.S. Retail & Distribution sector leader, Deloitte LLP. "In addition to a challenging economic climate, shifts in consumer behavior – from price consciousness to technology adoption – will force retailers to find new ways to remain relevant to their customers in 2012. Retailers should align talent, physical space, processes and technology in a way that moves the in-store environment from transactional to a complete and engaging brand experience."

Highlights of the Index include:

Tax Burden: The tax burden rose slightly to 11.09 percent as state and local governments increased taxes to cover budgetary shortfalls.

Initial Unemployment Claims: Claims moved lower in the most recent month to 396,250, falling below the 400,000 mark for the first time in seven months.

Real Wages: While down 2.1 percent from a year ago, real wages posted a small gain to $8.75 on falling energy prices.

Real Home Prices: Prices fell 5.72 percent from a year ago. Real home prices are now down to levels not seen since the middle of 2000.

Consumer spending in 2011: The year in review

Three factors significantly boosted consumer spending in 2011, according to Deloitte's analysis of U.S. Commerce Department data:

Gasoline prices have fallen roughly 60 cents a gallon, since peaking in May which adds $80 billion to household purchasing power.
A sharp drop in the savings rate from 5 percent to 3.5 percent has added $150 billion to consumer purchases.
The 2 percent cut in Social Security tax withholding last January added another $90 billion.

Together these developments represent a gain of $320 billion, yet real consumer spending during that period increased just half that amount, by $160 billion.

Additionally, real disposable incomes have declined on a year-over-year basis for the past four months. Job growth has been in lower-income industries, while the job loss has been in higher-income industries like government and financial services, adding to the weakness in household earnings.

Outlook for 2012

The ability for consumers to continue to spend at the rates seen in 2011 may be in question.

"Going forward, it is unlikely there will be another tax cut, and Social Security tax withholding may rise back to its previous level by March," said Steidtmann. "Another 150 basis point drop in savings is not likely, and while gas prices can always fall, the rising tensions in the Middle East would argue against such a drop."

Steidtmann contends that without income growth, spending will contract in a way that outpaces the decline in incomes.

About Deloitte's Retail & Distribution Practice

Deloitte is a leading presence in the retail and distribution industry, providing audit, consulting, enterprise risk management, financial advisory and tax services to 80 percent of the Fortune 500 retailers. With more than 1,400 professionals, Deloitte's Retail & Distribution practice delivers insights and solutions assisting retailers across all major subsectors including apparel, grocery, food and drug, wholesale and distribution and online address critical issues affecting their businesses. For more information about Deloitte's Retail & Distribution sector, please visit www.deloitte.com/us/retail-distribution.

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SOURCE Deloitte