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Is U.S. Retail On The Rebound?

When consumers are optimistic — about their jobs, their finances, their government — they go shopping.

By Karolyn Schuster
Until consumers’ confidence returns and they resume spending, the recession won’t really be over, no matter what the economists tell us, no matter what the government claims, no matter what the other economic indicators say. Economists, marketers and retailers alike were encouraged by the fact that the Consumer Confidence Index (CCI) released by The Conference Board at press time in late May reached a five-year high. The accompanying press release said the “back-to-back monthly gains suggest that consumer confidence is on the mend.” 
   The next question is when — and if — those more-confident consumers start shopping. It is consumer consumption, after all, that drives the economy. In the U.S., it is generally acknowledged that consumer spending is responsible for 70 percent of the gross domestic product (GDP).
   Measuring and tracking consumer confidence is key to consumer spending because confident consumers are more willing to spend. GDP growth depends on secure, optimistic consumers investing in new automobiles, trading up to more expensive homes, taking vacations, dining out and purchasing furniture, clothing, luxury goods and gifts for family and friends.
   There may be isolated exceptions of depressed consumers who use shopping as “retail therapy” but, in general, consumers who are worried or insecure don’t go shopping. Instead, they use their cash to build up savings and pay down debt. They hunker down. They question each purchase, focusing on essentials like food, shelter, clothing and gas for their automobiles. They rein in discretionary spending, especially luxury items, such as vacations, jewelry and dining out.
   Consumer confidence reflects consumers’ personal sense of security and prosperity, including their comfort level with their personal income, their jobs and their family financial situation, both now and into the future. But consumer confidence also reflects consumers’ assessment of the health and vitality of forces outside their own lives, primarily the national economy and its various economic indicators.

MEASURING CONFIDENCE
   Two widely reported monthly surveys — The Conference Board’s CCI and Thomson Reuters/ University of Michigan’s Index of Consumer Sentiment — are considered the gold standards of consumer confidence analysis. Both have been in business for decades but they attracted heightened attention during the recent recession/recovery for their accurate readings on the volatile national consumer confidence. They are closely watched as leading indicators of the future course of the U.S. economy.
   The CCI, based on surveys of 5,000 households, measures consumers’ perception of current business and employment conditions, in addition to their expectations for those conditions plus family income for six months into the future. The Conference Board has used the same questions and mail survey collection method since the start of the series in 1967. The year 1985 is used as a benchmark.
   The Index of Consumer Sentiment is based on the University of Michigan’s Surveys of Consumers, which have been conducted by the university since 1946. The survey contains approximately 50 core questions asked of 500 respondents in telephone interviews.

 
BEHIND THE NUMBERS
   “It’s true that consumers have not rebounded in sentiment and spending the way we expected,” says Lynn Franco, director of economic indicators and surveys at The Conference Board. “They are, in fact, lagging the economy. We can tell from the readings we are getting that there’s still some pessimism being expressed among consumers in terms of their spending. With so much uncertainty hanging over consumers, they’re still only spending sporadically and in spurts.
   “The key to consumer confidence is and always has been the labor market and jobs because that’s the primary source of income for consumers and so it has the biggest impact,” continues Franco. “Right now, we are seeing a positive impact from what’s happening in the financial markets. We are beginning to see a bit of a positive impact from what’s happening in housing, which is finally turning around. And while job growth is, perhaps, not as strong as we’d like — it’s not over 200,000 — we are at least adding jobs. So there are three factors at play here, but the most critical is and has always been jobs.”
   Pam Goodfellow, consumer insights director for Prosper Insights and Analytics, a consumer intelligence company headquartered in Worthington, Ohio, agrees that “There’s still volatility in the markets and in the economy. Consumers are still uncertain about the future direction of things. If we are in a recovery, it’s a very slow-going, marginal recovery. It’s not like the economy has raced back and we’re done and over the recession. The official unemployment rate has ticked down but labor force participation has also declined. This conflicting information kind of muddies things up. Economists are looking at the big picture. But the consumer is looking at a neighbor or relative who has been out of work for a long time. Maybe he thinks about how long it’s been since he’s gotten a raise at work. These personal experiences play into this hesitancy we are seeing.”
   In the monthly online surveys Prosper conducts of 5,000 consumers across a broad income and demographic spectrum, Goodfellow says, “The number who say they are confident or very confident is at 40 percent and that’s about the highest we’ve seen in quite some time. Still, we have not seen two consecutive month-to-month increases in confidence since the third quarter of 2012. On the one hand, consumers say they are more confident. But at the same time, they remain very conservative and uncertain in their spending. Those two forces are playing against each other. Consumers’ spending mindsets are only marginally improved from where they were in the depths of the recession in 2008 and 2009.”

GOVERNMENT: A DRIVER OR A DRAG?
   According to the release accompanying the preliminary March 2013 estimate for the Index of Consumer Sentiment, “Never before in the long history of the surveys have so many consumers spontaneously mentioned that the disarray in federal economic policy was the main problem facing the economy.”
   “Consumers look to the government to drive a recovery,” says Goodfellow, “and because of the advances in digital technology, we’re taking in more information so we’re more cognizant of what they’re doing. We saw that the debt ceiling crisis in the summer of 2011 really drove confidence down — it just plummeted for a couple months and that was right before the holiday season. It impacted how consumers were going to spend for the holidays.”
   Franco says, “What’s happening now is the degree of uncertainty. Take a look at the past several months. We went from fiscal cliff to payroll tax hike, then a month of reprieve, then the sequester. There have been so many of these large ‘shock events’ and they create a great deal of uncertainty.”
   More discontent with the national government in terms of consumer confidence was revealed in the 2013 Survey of Affluence and Wealth in America, conducted by American Express Publishing and Harrison Group, a YouGov market research and strategy consulting firm headquartered in Waterbury, Connecticut. The survey found evidence of a serious disconnect between the wealthiest consumers when comparing their personal satisfaction with their satisfaction in the national economy. The survey was based on 1,416 online interviews conducted in the first quarter of 2013 among consumers in households with discretionary income in excess of $100,000, considered the top 10 percent of the country’s highest-income households.
   In findings labeled “Personal Success, National Discontent,” the survey found 55 percent of respondents reporting that their total household assets improved in the first quarter 2013 compared to a year earlier, 46 percent that their household financial situation improved and 41 percent that their household income increased. But 76 percent of this same highest-income group believes the U.S. is still in a recession and 60 percent that it will last another year or longer. At the same time, 63 percent of these wealthiest of Americans said the performance of the national government is worse than a year ago, 56 percent that America’s reputation in the world has declined and 34 percent that the national economy has worsened.
   The significance of these negative opinions about the national economy, especially when compared to their assessments of their personal economic situation, is heightened by the fact that these are potentially the country’s biggest spenders, especially in luxury. It is a group described by Cara David, of American Express, as “awash in cash.” Their balance sheets are in the black, many of them own their homes outright and a majority of them have zero credit card debt.

LUXURY’S DIFFERENT INDICATORS
   “Consumer confidence is more indicative of what the mainstream American is feeling as opposed to the very wealthy. So, while consumer confidence plays an important role in luxury spending, the two biggest macro factors that impact luxury sales are stock market performance and GDP growth, according to my correlation analyses examining luxury sales vs. the major macro indicators,” says David Wu, luxury analyst for Telsey Advisory Group, New York City–based research and brokerage firm that focuses on the consumer market.
   “And really, stock market performance is the biggest driver of the ‘feel good factor’ that fuels luxury sales,” says Wu. “As net worth and the stock portfolio of luxury consumers increase, they are more likely to buy luxury goods, such as a Swiss watch or a piece of jewelry.”
   Wu does see a differential between the high end of the luxury market and the entry level, “where luxury players are more impacted by consumer confidence, as well as unemployment. The fact that we start to see a bit of a rebound in the real estate market is helping the entry-level consumer. There’s a little bit of wealth creation from that. Unemployment continuing to come down also works in favor of that entry-level customer.”
   Wu notes that during the past recession, the first luxury players who witnessed a pullback in luxury spending were the entry-level players like Coach and Blue Nile. “The high end actually continued to fare well up until post-Lehman, when the stock market fell off a cliff,” he adds. “That’s when the high end pulled back. That’s when the likes of Richemont and Hermes saw a pullback in the U.S. That shows that the biggest factor impacting high-end luxury spending is the stock market.”

ARE WE THERE YET?
   “While confidence has been on a jagged incline recently from the lows reached during the Great Recession, as well as 2011’s debt crisis,” says Goodfellow, “we still have a long way to go to get back to where we were in 2007.”
   Despite encouraging and significant recent improvements in other economic indicators — especially the stock market and home prices — retail sales still haven’t taken off. Seasonally adjusted retail sales declined by four-tenths of one percent in March and increased by one-tenth of one percent in April, according to the U.S. Department of Commerce. That is frustrating to a country that wants to be convinced the recession is over — finally, undeniably, conclusively over.
   “Confidence is definitely lagging other economic indicators,” says Franco. “It will be interesting to see what happens in the next few months, if we can gain and maintain that little bit of traction we saw going back into November and December before all the shocks started to occur. “
   Franco believes in consumers because, she says, “Although they are only one piece of the puzzle, they are out there on the front lines relaying information long before some of the government statistics are available. And they always have been very accurate predictors of recessions and downturns. In that sense, while they may have a very localized view, they give us a very accurate reading. And I think their perceptions aren’t clouded by all the conflicting economic data that we get.
   “It’s just been a very volatile few months,” Franco concludes. “Until we put this volatility behind us, it’s very hard to say if we will be able to gain and sustain momentum.”

WILL THE WEALTHY LEAD THE REBOUND?
   Affluent Americans are secure, happy, sitting on piles of cash — and luxury retailers want them back. They might just get their wish. Sales of luxury goods to the wealthiest Americans are projected to increase by 3.4 percent in 2013, with jewelry up by 5 percent and watches by 10 percent. Total spending in 13 core luxury categories is expected to total $247 billion for the year.
   These forecasts were part of the 2013 Survey of Affluence and Wealth in America conducted by Harrison Group and American Express Publishing. For the first time in two years, more wealthy consumers plan to substantially increase rather than decrease their spending in key luxury categories. Although luxury continues to lag, says Dr. Jim Taylor, vice chairman of Harrison Group, “it’s only a matter of time before it begins to pop.”
   Affluent consumers spent the recession much the way the rest of the population did. They paid down debt, shored up savings and cut back on spending. And, like the rest of the population, they became more careful about what they buy. Cara David of American Express noted that the way the affluent shop for goods, including luxury, “was forever changed by the recession.”
   Taylor says that “lessons learned from the recession — resourcefulness, self-reliance and a deep sense of financial responsibility — continue to dominate purchasing strategies in the country’s most successful households.” He adds that two different types of luxury consumers emerged from the recession: the quality-focused Worth Dominants, a group willing to spend whatever it costs for products of the highest quality, representing the best materials, craftsmanship and service, and the price-focused Deal Dominants, a group after the lowest “bargain” price for luxury goods.
   In other good news for the watch and jewelry industry, affluent shoppers in those two product categories were less likely to be Deal Dominant shoppers and more likely to be Worth Dominant than in any other luxury category surveyed. There is a general feeling of “it cost more, but it’s worth it. It’s something I’m proud to own” in this shopping group. In fine jewelry and watches, Worth Dominants, who are expected to spend a total of $58 billion on core luxury product categories in 2013, will outspend Deal Dominants by 850 percent.

Article from the Rapaport Magazine - June 2013. To subscribe click here.

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