2012 not looking good for consumer spending

NEW YORK — The Deloitte Consumer Spending Index continued on a downward trend in January, and consumer spending will face additional economic headwinds in 2012, according to Deloitte. The index tracks consumer cash flow as an indicator of future consumer spending.

"A sharp fall in real home prices primarily contributed to the decline in the Index," said Carl Steidtmann, Deloitte's chief economist and author of the monthly index. "While initial unemployment claims ticked lower, real wages and the tax burden showed no improvement leaving little to offset the housing market's negative effect on the Index."

Deloitte's analysis of U.S. Commerce Department data indicates that the weakness across economic fundamentals over the past several months may continue and further crimp consumer spending in 2012.

Real incomes declined on a year-over-year basis for the fifth month in a row. While a social security tax cut boosted incomes in January 2011, incomes are set to continue falling without an additional cut this year.

New and existing home sales remain weak, and prices continue to decelerate. Current government proposals to improve the situation, even if approved, will take time to develop, implement and affect the housing market.

Tax increases at the state and local level are raising the overall level of taxation and reducing consumer purchasing power.

The index, which comprises four components — tax burden, initial unemployment claims, real wages and real home prices — fell to 1.73 from a revised reading of 1.90 the previous month.

"The likelihood that consumer spending power will be further stretched this year puts a brighter spotlight on one area of retail — pricing," said Alison Paul, vice chairman and Deloitte's retail & distribution sector leader. "While consumers may be price conscious, retailers need to pursue strategies that drive profitability, not just traffic and sales volume, while also taking into account broader economic events that affect their entire operation.”

A cross-functional approach that includes technology, store operations, inventory management, merchandising and marketing, said Paul, is necessary to develop an effective pricing strategy for a retailer's multiple sales channels.