Surging home values will fuel consumer spending and trigger purchases of furniture, consumer electronics and home improvements, despite higher industry rates, according to a public accounting and consulting firm’s index of consumer spending habits.
“Consumers are in a strong position to continue spending. Retailers should plan for strong demand, particularly in housing-related products and consumer electronics,” said Carl Steidtmann, Deloitte Research’s chief economist and author of the monthly Leading Index of Consumer Spending.
Substantial income-tax refunds and a leap in payroll employment provide the cash needed for down payments on home purchases.
“Many consumers postponed buying new homes until interest rates reached the bottom. With interest rates on the rise, they have decided to get off the dime to avoid higher rates,” Steidtmann added.
“Baby boomers are purchasing their second homes in retirement and vacation spots, while children of baby boomers are purchasing their first homes at the low-end, creating a chain reaction. Essentially, consumers are trading their current residences for a better home,” he said.
Steidtmann is an expert on economic forecasting of retail sales activity, consumer trends, technology and general economic trends. He is based in New York, where he works with clients to assess the impact of economic, demographic, political and technological changes on their business strategies.
The index tracks consumer cash flow as an indicator of future consumer spending. Highlights of the findings include:
- Home prices adjusted for inflation fell slightly in March, but remained significantly higher than they were at the same time in the previous year. Home mortgage refinancing has created a larger pool of cash for construction, remodeling and other housing-related expenses.
- Initial unemployment claims dropped 20 percent on a year-over-year basis. That adds strength to the index and indicates steady improvement in the job market.
- An increase of 513,000 jobs in the first quarter of 2004 suggests job-growth momentum will continue throughout the year. However, wage gains adjusted for inflation have flattened in recent months after strengthening last year. Barriers to real-wage gains include accelerating inflation and rising benefits costs.
- Tax-code complexity and the higher number of taxpayers subject to the Alternative Minimum Tax have led to later tax return filings. That means tax refunds will fuel consumer spending in May and June.
“We have reached an inflection point in the economy. While in the past, growth was fueled by low interest rates and tax cuts, we are now seeing growth stem from rising housing values and job creation,” Steidtmann said.
The index, which is comprised of tax burden, initial unemployment claims, real wages and real home prices, rose to an all-time high of 5.46 percent in March, up from an upwardly revised gain of 5.11 percent the previous month.