Consumer spending index continues decline in January

As economic conditions trend downward, consumer purchasing appears to be at an important turning point, the Deloitte Research Leading Index of Consumer Spending has found.

"The Index turned from positive to negative in real growth terms in January, indicating a much tougher environment for retailers in the months ahead," says Carl Steidtmann, chief economist with Deloitte Research and author of the monthly index.

The Deloitte Research Leading Index of Consumer Spending tracks consumer cash flow as an indicator of future consumer spending. The index comprises four components – tax burden, initial unemployment claims, real wages and real home prices – that fell in January 2008 to 1.47 percent from a revised gain of 1.91 percent a month ago.

This was the fourth consecutive fall in the index after September 2007, suggesting that consumer spending may be nearing a turning point. Year-over- year growth in personal consumption expenditure (three-month moving averages) has been in continuous decline after October 2007.

"Falling home prices have pulled the index value down by nearly 1 percent this month," says Steidtmann. "Additionally, a drop in real hourly earnings, due to food and energy inflation, was the second major factor pushing the index south. Rising unemployment remains the biggest risk to consumption expenditure in the months ahead."

"With the Leading Index now declining, the outlook for retailing is worrisome," says Stacy Janiak, vice chairman and U.S. retail leader, Deloitte LLP. "To succeed in this difficult environment, retailers must be innovative in their approach to both marketing and merchandising. For many companies, this is not the time to be cutting back on technology investments. Delivering a seamless multi-channel experience, reaching out to new customers through social media and other online vehicles, and maintaining the right demand- driven inventory levels are just some of the ways that retailers can address the weakening spending environment."

Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:

– Tax Burden: The tax burden fell to 2.6 percent on a year-on-year basis

      in January. Falling tax rates are the only factor preventing a greater

      fall in the index.

– Initial Unemployment Claims: The year-over-year growth rate in

      unemployment claims was higher in January compared to the previous

      month. The deterioration of the labor market has spread beyond

      construction and manufacturing and into services.

– Real Wages: Real wage growth rate fell sharply below zero in January

      2008. Rising energy prices are taking a serious toll on real wages.

– Real Home Prices: House prices remain the weakest link in consumer

      spending. Prices fell by 10.5 percent in January. Elsewhere, data

      showed no signs of a bottoming out in the housing market with falling

      sales of new as well as existing houses.

For more information about Deloitte's Retail group, please visit www.deloitte.com/us/retail.

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