Consumers Are Holding Back


Economic uncertainty has Americans postponing purchases of all manner of pricey items, from cars and homes to clothes and electronics

Amy Welling would like to buy a house. And why not? She just got married last month, and what better way to start life as newlyweds than to move into a house you own together?

However, Welling and her husband, Michael, are so wary of the uncertain economy that after weeks of house hunting they have decided to continue to rent. The Wellings saw firsthand how many houses are on the market, some for as many as 20 months. And besides, they may be ready to pick up and relocate soon anyway: Welling, who is working two jobs, will graduate later this year with a master's degree in exercise physiology from Southern Illinois University in Carbondale, Ill., and she hopes that by next year her husband's PhD will be complete. "We don't want to be stuck with a house we can't sell," says Welling.

A large number of Americans seem to have entered a state of consumer paralysis. Whereas for years they had a bottomless appetite for McMansions, SUVs, big-screen TVs, and new wardrobes, today more people are hitting the pause button. If it's not would-be buyers like the Wellings holding off buying a home, it's the home sellers who are deciding to stay put rather than take a much lower price. Decisions are likewise being deferred on cars, electronics, and clothes.

Not Too Optimistic

The temperature readings that came out on consumers this week were almost uniformly bleak. Auto sales fell in the first two months of the year (BusinessWeek.com, 3/18/08), and J.D. Power & Associates predicts total U.S. sales in 2008 will total 14.95 million vehicles, which would be the lowest annual total since 1995. Retailers are struggling, from discounters such as Target (TGT) to midmarket department store chains like J.C. Penney (JCP) to Nordstrom (JWN) at the higher end. And even the top-performing electronics chain, Best Buy (BBY), has cut its fiscal 2008 profit forecast, blaming weak sales of TVs, digital music players, cameras, and video games. "People aren't going to buy cars or TVs when they are finding out that the value of their personal balance sheets are unclear," says Pat Conroy, vice-chairman of Deloitte & Touche USA.

That message came through loud and clear in the latest consumer confidence survey released on Mar. 25 by the Conference Board (BusinessWeek.com, 3/27/08). The index slumped in March, the third straight month of sharp declines. Its reading of 64.5 on a scale of 100 was the lowest since 2003. Consumer expectations about the future are at their lowest point since the recession in the early 1970s.

What's keeping some Americans up at night is uncertainty: about the fate of their employer, about steadily rising gas and food prices, and about their ability to handle huge credit-card bills or resetting mortgage rates. "Consumers are concerned about future job prospects, and the high level of gas and food prices has devastated the financial situation of lower-income households," says Richard Curtin, a University of Michigan research associate professor and director of the Reuters/University of Michigan monthly consumer survey, which will come out later this week.

Bulking Up

The only thing that people load up on these days are basic necessities (BusinessWeek.com, 1/17/08). They flock to stores where they can save money by buying items in bulk—places like Costco (COST), which reported earlier this month a 31% profit increase in its latest quarter, and BJ's (BJ), the warehouse-club chain that reported that its profit quadrupled in the first quarter. Sales of food and other grocery items increased at Wal-Mart Stores (WMT), giving its February retail sales a 2.6% boost.

Where people see real deals, they are spending, though not lavishly. Whereas almost all retailers reported negative sales for apparel and home goods for the past three months, TJX (TJX) has not reported a single month of negative sales during the downturn, including a 3% same-store sales gain in February. The Framingham (Mass.)-based off-price retailer buys excess merchandise in bulk from manufacturers below wholesale prices and sells them at its T.J. Maxx, Marshalls, and Home Goods stores. "Deals are about the only thing that's working right now," notes Deloitte's Conroy.

Mixed Housing News

The same logic might also be at play in the housing market. The Standard & Poor's/Case-Shiller index, which tracks prices for 20 major cities, reported that house prices in every city that it tracks have fallen for five consecutive months. Those prices were down 10.7% in January from a year earlier. But some people apparently are starting to poke their heads out of their foxholes to look for bargains. Sales of existing homes increased for the first time in seven months, rising 2.9% in February from January, according to a National Association of Realtors report that came out on Mar. 24.

Of course, a day after the NAR report came out, the Commerce Dept. countered it with data showing that new-home sales had dropped 29.8% last month (BusinessWeek.com, 3/26/08) from a year earlier, to a seasonally adjusted annual rate of 590,000 units.

What might give consumers some hope? Mortgage rates could begin falling in line with lower shorter-term rates. And the federal government's tax rebate checks—$600 for most individuals and $1,200 for couples filing jointly, with a $300 per-child credit—will be mailed out starting in May. The University of Michigan's Curtin says he found that 70% of those people who are due to receive checks plan to pay down credit-card bills and build up savings, rather than spend the money. But even that will help, he says: "That will free up some money for some spending and will definitely produce a noticeable blip in GDP."


Steve Ballmer, Power Forward
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