Gallup's Aug. 9-11 poll* indicates that consumer confidence
measures declined again in mid-August, reaffirming the downward
trend in consumer and investor optimism. The decline first surfaced
with the July drop in the UBS/Gallup Index of Investor Optimism,
and the downtick in Gallup's July 30-Aug. 1 consumer confidence
measures accentuated it.
More importantly, consumer spending intentions fell sharply this
month, nearly erasing their July gains. This drop squares with the
weaker-than-expected improvement in July retail sales and does not
bode well for the remainder of the back-to-school sales period.
Not only did spending intentions decline across all income
groups in early August, but the differences between the spending
intentions of upper- and lower-income consumers also narrowed
substantially, suggesting that consumer spending will be weaker
than hoped across the retail industry in the weeks
ahead.
Consumer Spending Intentions
During the second quarter of 2004, consumer spending intentions
(the percentage of consumers planning to increase their
level of spending over the next six months minus the percentage
planning to decrease their spending) remained virtually
unchanged from the first quarter among the top two income groups
(those with annual household incomes between $30,000 and $75,000,
and those with incomes of $75,000 or more). However, the spending
plans of consumers in the lowest household income category (less
than $30,000) continued to plunge in the second quarter following a
sharp first quarter decline.
Although monthly spending intentions data are somewhat less
reliable than quarterly data, monthly spending intentions showed a
strong increase across all income groups in July. Spending
intentions among the lowest-income consumers improved
significantly.
But in mid-August, spending intentions among all three income
groups decreased, by about equal amounts. Overall, the intentions
of consumers in the upper two income groups are lower than they
were during the second quarter. While the spending plans of those
with household incomes of less than $30,000 remain weak, they are
still better now than they were during the second quarter.
Bottom Line
After increasing interest rates a week ago, the Federal Open
Market Committee (FOMC) noted, "In recent months, output growth has
moderated and the pace of improvement in labor market conditions
has slowed. This softness likely owes importantly to the
substantial rise in energy prices. The economy nevertheless appears
poised to resume a stronger pace of expansion going forward."
Maybe the FOMC knows something the rest of us don't. Gas prices
continue to decline at the pump, even though the price of oil
continues to surge. If this seemingly illogical trend were to
continue and expand, then declining gas prices could help stimulate
consumer spending in the weeks and months ahead.
But barring such an unexpected turn of events, consumer
confidence and spending intentions, combined with the high price of
oil, suggest that American retailers will have disappointing
back-to-school sales in the coming weeks. Even upper-end retailers
are likely to fall short of what they had hoped for a few weeks
ago.
I believe that the "softness" the FOMC referred to in its recent
statement will be more significant than expected, endangering the
"stronger pace of expansion" that the FOMC forecast going
forward.
*Results are based on telephone interviews with 1,017
national adults, aged 18 and older, conducted Aug. 9-11, 2004. For
results based on the total sample of national adults, one can say
with 95% confidence that the margin of sampling error is ±3
percentage points.
