Consumer Spending Charges Back


By Amey Stone For a brief period last fall, the American consumer started to flag. With gasoline prices skyrocketing, inflation creeping up, and the job market sputtering, shoppers curtailed their spending. Thanksgiving weekend was a disappointment for many retailers. The discount sector was particularly hard hit as middle- and lower-income consumers felt the pinch of higher pump prices.

Now the U.S. consumer is back and raring to go. Surprisingly, holiday shopping gained momentum throughout December. Retail figures reported Jan. 4 by the International Council of Shopping Centers (ICSC) and UBS Bank showed sales in the last week of month climbed 4.6% over the same period last year -- the strongest annual increase that month. "The performance over the last two weeks was a pleasant surprise to an uncertain and uneven season," said ICSC chief economist Michael Niemira in the release.

ENERGY TO SHOP. On Jan. 3, Wal-Mart (WMT) estimated that sales were up 3% in December, when just one week earlier it had said monthly sales would likely grow 2% (retailers report final December sales on Jan. 6). Visa USA said on Jan. 3 that sales volume on its cards the week after Christmas was $21.2 billion -- a 20% increase over that week in 2003. Luxury-goods sellers and online retailers experienced the most growth, analysts say. Cybersales were up 39% over the same week last year, according to Visa.

Why are shoppers so refreshed, when they should be tapped out following the Christmas shopping frenzy? It's pretty simple, really: Thanks to a mix of economic and business trends, folks now have a bit more cash in their pockets than they did just a few weeks ago.

For starters, gasoline prices are falling. On Jan. 3, the Energy Dept. reported that they declined for the eighth consecutive week -- a trend with a direct link to Wal-Mart's sales improvement, says Moody's Investors Service. At a national average of $1.78 a gallon, gasoline is now 13% lower than it was in mid-October and 8% below where it started in December, according to Moody's. It's back to the price of April, 2004 -- not cheap, but somewhat less painful at the pump.

PRICE-CUTTING. "Gasoline is very much a factor," says Mike Englund, chief economist at research firm Action Economics. "It helps explain the change in tone we saw through December." It also helped that home heating oil never reached the levels feared, says Richard Hastings, retail economist for Variant Research.

Many analysts think oil could slip back to $40 a barrel in the coming weeks -- still high by historical standards, but a major improvement from the October peak of $56. Crude oil futures traded on the New York Mercantile Exchange closed at $43.91 on Jan. 4. Moody's believes consumers have shown they can handle oil in the $40s without shutting down their spending.

It has also helped that stores have slashed prices. They reacted early in the month at the first signs that sales could be disappointing. "Things were trending below normal, but the industry responded very successfully with promotional markdowns," says Hastings. The discounting continued post-Christmas, as retailers sought to clear out seasonal inventory.

BACK TO WORK. The popularity of gift cards is also stimulating post-holiday spending as consumers rush to take advantage of sales (see BW Online, 12/28/04, "Holiday Shopping's Second Season"). Wal-Mart noted in its weekly sales summary that gift-card redemption was up "significantly" this year over last.

Cheaper prices wouldn't have created such a surge in sales volume if Americans weren't also feeling better about the economy in general. Consumer confidence surprised to the upside, with a surge reported on Dec. 28. Gains in the stock market, a more positive news flow after the election, and increases in wage levels all contributed, says Englund.

Hourly earnings rose in December at the same time that initial jobless claims dipped. On Jan. 7, the Labor Dept. reports on payrolls, and Action Economics expects 175,000 new jobs to be created -- not a blockbuster month, but a healthy increase that builds on gains of the past year.

BEWARE OF INFLATION. The fact is, consumers are still benefiting from the 2003 tax breaks and continued low interest rates, says Englund. That's because both fiscal and monetary policy have significant lag times in terms of economic impact. And even though the Federal Reserve raised short-term interest rates repeatedly in 2004, long-term rates didn't follow. Says Englund: "Many Americans are still experiencing the lowest interest rates of a lifetime."

The biggest threat to the renewed strength in consumer spending is incipient inflation, analysts agree. Not only would clear signs of spiraling prices require more aggressive rate-raising action by the Federal Reserve (which would make all that debt more expensive for consumers to carry) but many job categories, including some manufacturing and entry-level retail positions, also wouldn't keep pace with consumer price increases. "It's still a big problem that for certain labor categories wage growth is going to continue to be insignificant, and inflationary pressures will hurt them more," says Hastings.

American consumers took a temporary break from spending in November only to come back with a vengeance in December. Now the U.S. economy just has to deliver decent wage gains, stable energy prices, and lots of discounts to keep them out in the malls in 2005. Stone is a senior writer for BusinessWeek Online in New York


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