Slower Housing Market Hampers Consumer Spending

The Central Valley Business Times discerns that continued weakness in the housing market is softening consumer spending in the U.S., a factor that’s not surprising given the impact of real estate on the overall economy.

“While consumer spending still has good momentum going into the New Year, we’re seeing a balancing act between the housing market and the labor market, which exert opposite forces on the economy,” said Carl Steidtmann, economist with Deloitte Services LP’s Deloitte Research, and author of the company’s monthly index of consumer spending.

“Real wages continue to be strong, fueled by lower energy prices and a strong labor market. On the other hand, the U.S. housing market continues to show weakness, with the secondary effects of lower mortgage refinancing activity, which puts less cash in consumers’ pockets, and potentially lower construction employment,” he added.

The Deloitte index is comprised of four separate components - tax burden, initial unemployment claims, real wages and real home prices - fell to 3.58 percent, from a downwardly revised gain of 3.86 percent a month ago.

“Following a solid holiday season, retailers can now turn their attention to how to make next holiday season - and the months in between - even better,” says Pat Conroy, a vice chairman of Deloitte.

“As we found in our recent survey, many consumers walked out of a store without buying what they wanted this holiday season - and many of their reasons are fully within retailers’ control,” Conroy said.

He suggests retailers turn their attention to management of their inventory, ensuring store staffing matches shopper traffic, and improving selling tactics. Highlights of the index, tracking consumer cash flow as an indicator of future consumer spending, include:

Tax Burden
Personal income tax burden continues to rise slowly and is up more than 1.0 percent of income from a year ago.

Initial Unemployment Claims
Since the first of the year, claims have averaged between 300,000-325,000 claims per week. As a share of total employed, claims are lower than at any time since the 1960s. Claims for the month were down slightly, giving a boost to the index.

Real Wages
After rebounding through the fall, real wages were flat for the month, but still up 1.7 percent from a year ago. Higher energy prices in December put a cap on real wage growth. Falling energy prices in January should have a positive impact on the index next month.

Real Home Prices
America’s home prices fell in December and prices for the previous month were revised downward. The inventory of unsold homes has risen sharply over the past year as has the share of unoccupied homes.

Defaults on sub-prime [or bad credit home loans] are rising, adding to the problems in the housing market. Mortgage refinancing is closely tied to the rise and fall in home prices.

Declining home prices reduces a key source of cash for consumers, who depend on their accumulation of home equity to produce cash in the form of home improvement or home equity loans.

SOURCE: Central Valley Business Times