If consumers are mildly optimistic about the general economy, they are practically in despair over their personal financial condition. Their personal-income expectations for the year ahead are “at the lowest level we’ve ever recorded, going back to 1946,” Curtin says. “They’ve lost jobs, work hours, and bonuses. They don’t see help on the horizon.” He thinks it may take a decade or longer for unemployment to return to 5%.
As a result, consumer spending will lag, not lead, the economic recovery, predicts Curtin. “Consumers will use less debt and save more than they have in the past,” he says. “Baby boomers are focusing on rebuilding their savings and investment funds for retirement.”
Americans will spend more on cheaper private-label brands, keep their appliances and cars longer, and cut back on their driving, something people do anyway as they age, says Curtin. “This means that the rate of growth in consumer spending, which has been around 3.5% for the past 30 to 40 years, will drop to around 2.5% going forward, with negative repercussions on the rate of growth and employment,” he predicts.
Higher taxes on the horizon may further reduce discretionary spending, notes Curtin. Two Bush-era tax cuts are scheduled to expire by the end of 2010, as well as the Obama payroll-tax cut enacted last year. And judging by legislation currently in Congress, some taxpayers could eventually face a new levy, to help pay for health-care reform.
Santa or Grinch?
A consumer-spending reality check is in the offing at this very moment as the all-important holiday shopping season reaches its peak. Some market researchers predict that holiday retail sales will modestly improve on last year’s disastrous sales, which left retailers awash in inventory. Wyss of Standard & Poor’s believes this year’s sales are “going to be bad, but not as terrible as last year, if for no other reason than the stores are expecting it this time, so they’re cutting back on inventory.”
A gloomier forecast comes from America’s Research Group, a consumer research firm. ARG’s telephone surveys indicate that “a retail train wreck” lies ahead, according to Britt Beemer, the firm’s founder and chairman. Beemer, who says he has forecast retail sales within 0.5% for 17 of the past 18 holiday seasons, predicts that same-store sales in November and December will fall by 2.9%, compared with a decline of 2.7% in 2008.
Beemer says his pessimism stems from ARG research showing that only 2% of Americans are spending at an “unencumbered” level. The other 98% are encumbered by concerns about their jobs, onerous credit-card debt, or the loss of income and wealth in the stock market in 2008 — all of which “will cause them to spend a lot less,” he says. “Normally 36% to 47% of consumers are unencumbered.” As for holiday gift-giving, 51% of those surveyed by ARG in November said they will spend less on gifts this season, compared with 40% in 2008. (For more on anticipated holiday spending trends, see “The Quiz.”)
Ironically, despite his own grim forecast, Wyss suggests that consumer surveys may overstate the gloom. “People always talk a good game [about cutting back],” he says. “Every Christmas people take these surveys, and almost every year they say they’re going to spend less. And almost every year they end up spending more.”
Even if the holidays don’t equate to retail Armageddon, the long-term outlook for consumer spending remains bleak. Curtin predicts that consumption will expand by just 1.6% in 2010, while Nigel Gault foresees 1.5% spending growth (and 2.1% growth from 2009 to 2014). As for retail sales, Beemer doesn’t see a return of consistent growth in monthly same-store sales until March or April of 2011.
Edward Teach is articles editor of CFO.