“The holiday season was a positive one for retailers, with most early reports indicating that the season’s modest sales expectations were met,” said Carl Steidtmann, chief economist of Deloitte Research and author of the monthly index. “However, consumers were smarter this year: They waited until after Christmas to do much of their shopping at discounted prices, which will ultimately affect retailers’ margins. Going into the new year, we’re seeing a pickup in real wages, as the employment market improves and companies begin to implement plans to expand their workforces. Sales of durable goods continue to suffer, particularly in the automobile sector. And, we’re seeing a buildup in inventories of existing and new homes, which is putting pressure on housing prices. Overall, these factors point to a continuing challenging sales environment.”

The slower pace of growth in the index reflects softening housing prices, a rising tax burden and real wages below last year’s levels. After rebounding from last year’s hurricane season, the labor market now is adding positively to the index.

“As the first baby boomers begin to turn 60, retailers should continue to focus efforts around this cohort, who have high amounts of discretionary income,” said Pat Conroy, vice chairman and national managing principal of Deloitte’s Consumer Business practice.

The index, comprising four components—tax burden, initial unemployment claims, real wages and real home prices—fell in December to 2.73 percent, from an upwardly revised gain of 2.99 percent in November. The index, which tracks consumer cash flow as an indicator of future consumer spending, shows that:

• The personal income tax burden continues to rise slowly and is up more than 1.2 percent of income from a year ago. Faster growth and higher incomes are pushing more households into higher tax brackets and exposing them to the alternative minimum tax.
• Initial unemployment claims are falling as the rebuilding effort gets under way in the Gulf region. The rest of the country continues to enjoy solid employment growth. Continued tightening of the labor market points to better employment and wage prospects for workers in the future.
• Real wages, while down from a year ago, have been helped by declining energy prices and a tightening of the labor market. This combination should lead to higher real wages in the future, giving a boost to consumer purchasing power.
• Real home prices continue to fall and are down from a year ago. A buildup in unsold inventory for both new and existing homes points to softness in home prices for the foreseeable future. [March 2006 PET AGE]