Consumer Confidence Down

For the past five years consumer spending has been the engine of growth for the U.S. economy. In large part this spending was enabled by the red-hot housing market, which permitted homeowners to tap into some $1.2 trillion in their homes’ equity, allowing consumers to spend at a rate that far outpaced actual growth in incomes.

Now the slow down in the housing market has given way – not only to the global credit crunch – but to the looming possibility of a slow down in U.S. consumer spending.

With personal consumption accounting for some 70 percent of the economy, any potential slow down in consumer spending would only increase the possibility and fear that the U.S. economy would continue into a recession.

The recently reported retail figures for January only add to this prevailing atmosphere of fear surrounding the possibility of slowed consumer spending.

Retail sales figures for January, already lowered to account for expected economic weakness, were disappointing. Wal-Mart’s same-store sales rose 0.5 percent in January compared with a year earlier. They had expected a gain of 2 percent. For the fiscal year, Wal-Mart’s domestic same-store sales rose 1.4 percent, recording the lowest increase in 30 years for the chain.

From December to January, J.C. Penney saw same-store sales drop by 1.9 percent, while Macy’s and Kohl’s, two other well known department stores, saw a drop in same-store sales of 7.1 percent, and 8.3 percent respectively.

Recession fears were only worsened with recent reports highlighting the rise in the number of Americans filing for unemployment benefits. Figures released February 1 showed jobless claims rose by 69,000 for the week ending on January 26, according to the U.S. Labor Department. Now standing at the highest level since October of 2005, the total number of jobless claims stood at 375,000.

Sober economic news throughout the end of 2007 led to several cuts in interest rates by the Federal Reserve, and continued forecasts of economic weakness into the New Year led the Fed to further reduce rates with a surprising three quarter point cut on January 22 to the benchmark fed funds rate. This was followed by a 50 basis point cut on January 30 that lowered the funds rate from 3.5 percent to an even 3.0 percent, with discussion of future cuts still circling.

Aggressive measures have also been taken by Congress and the White House in the form of an economic stimulus package – which will send Americans a tax-rebate check between $300 and $600 – with the aim of giving both the economy and consumer confidence a boost.

Such attempts by Congress and the Federal Reserve to bump lagging consumer morale may eventually create a boost for the economy but thus far these measures have yet to generate the desired effect.

According to the Discover U.S. Spending Monitor – a monthly survey that measures consumer spending intentions and economic confidence by polling 15,000 consumers – nearly half of all consumers expected to spend less on discretionary purchases in February, as consumer confidence in the economy continues to slump.

The figures released on February 7 show that the Spending Monitor recorded a 4.4 point drop from January’s 90.5 to 86.1 as concerns over the economy grew and the holiday spending season came to an end.

This marks the third consecutive monthly decline, which started in October of 2007 at 96.5 and has dropped by 10.4 points overall.

Slowed spending should be of concern for the ARM industry as well. As consumer spending patterns shift due to feelings of financial constraint, payment hierarchies will shift as well, placing emphasis on making ends meet for the necessities such as food, fuel, and housing. As a result, recovery strategies in this environment will face the increasing challenges of coping with this prevailing consumer attitude of financial insecurity.