Jewelry demand in the U.S. softened dramatically in April due in part to a late Mothers Day selling period in May. Several jewelers commented that the timing of Mothers Day hurt April sales by several percentage points.

 

In addition, some jewelers have noted that high gasoline prices dampened demand. Store traffic seems to have slowed, and discretionary spending has weakened. Sales in department stores and apparel stores were weaker than expected in April, so apparently consumers are spending more time shopping at discounters as high gas prices take their toll on consumers’ pocketbooks.

 

April’s disappointing performance came after an unusually strong March as well as a six-month run of accelerating monthly sales gains. From a cyclical point of view, it was inevitable that jewelry sales would slow, but April’s decline year-over-year came as a surprise.

 

The graph below summarizes specialty jewelry sales versus sales of all retail goods (ex-automobiles) in the U.S. 

 

Source: U.S. Dept. of Commerce

 

Mall Jewelry Sales Slid In March

If we had seen March mall jewelry sales, perhaps we would have been prepared for April’s performance. Mall jewelry sales began their slide in March. While they remained above the same period in the prior year, they reflected significant weakening from prior periods.

 

The graph below summarizes mall jewelry sales trends versus sales trends from all specialty jewelers.

 

Source: U.S. Dept. of Commerce & ICSC

 

Luxury Goods Sales Trends Remain Solid

Americans’ appetite for luxury goods remains unquenched. Despite weak jewelry demand, consumers continued to purchase luxury goods at a strong pace. The graph below summarizes sales of luxury goods versus specialty jewelers’ sales.

 

Source: U.S. Dept. of Commerce & ICSC

 

Factors Affecting Consumer Demand

Drivers of retail demand in the U.S. are mixed. As we continue to remind readers, retail sales volatility at this time of year is not uncommon. Among the positive factors driving consumer demand are the following:

• Healthy labor market – Unemployment remains low, layoffs are on the decline, and job creation is still solid.
• Wages and salaries are growing – The tight labor market is helping to push up consumers’ wages.
• Wealth factor high – Despite a recent correction in the stock market, the consumer wealth factor remains in record territory in the U.S.
• Cheap apparel and textiles – The removal of quotas has brought down prices of apparel and textile items. Unit sales remain strong, though dollar sales have slid due to lower prices.

 

Among the negative factors constraining U.S. retail sales are the following:

• High energy prices – Whether it is gasoline, heating oil, propane, or natural gas, energy prices remain very high. With the summer driving season upon the nation, gasoline prices have only one way to go: up. Add a couple of Gulf Coast hurricanes to the mix (the hurricane season started May 31), and gasoline prices could reach European levels ($4 per gallon and up) by the end of the summer.
• Debt burden is high – The consumer debt burden is near record levels, and will increase as interest rates continue to climb.
• Negative vibes from the Fed – The Fed has stated that inflation is at or above their tolerable level. That means the Fed will take steps to cool the U.S. economy. This will hurt expansion prospects for the balance of 2006 and perhaps into 2007.
• Lack of home equity extraction – Home refinancing to withdraw capital from house price appreciation have slowed in recent months due to increased borrowing costs.
• Slowdown in home price appreciation – The housing boom is finally slowing, with home prices stabilizing and staying on the market longer. The good news is that we do not expect the housing market to collapse. The housing market is not nearly as liquid as the stock market (there are no day traders jerking the housing market around), and demographics favor solid long term housing demand.
• Rising health care costs – Rising employee benefit costs remain a constraint on wage gains.

 

IDEX Online Research’s Proprietary Jewelry Sales Forecast

IDEX Online Research introduced its proprietary jewelry sales forecast model for the U.S. market earlier this year. This mathematically driven projection uses a mix of historical performance, economic data, and other projections to produce a sales forecast for U.S. jewelry demand.

 

After weighing the negative factors – energy prices, debt burden, rising inflation, higher interest rates – with the positive factors – solid wage gains, strong personal balance sheets, and a healthy labor market – our latest forecast suggests that U.S. jewelry sales will rise by just under 5 percent this year.

 

Intuitively, this seems like a reasonable level of sales gain. Last month, we noted that the model was signaling an annual jewelry sales gain of about 6 percent, much higher than we were comfortable with. We don’t like second-guessing our mathematical model, but we are quite comfortable with the current forecast of 4.5 percent for the year.

 

The graph below summarizes our current forecast for U.S. jewelry sales in 2006. Prior years’ comparisons are also shown.

Source: IDEX Online Research