IDEX Online Research: Don’t Panic, but U.S. Consumer Spending at Modest Risk
August 27, 07Despite roiling financial markets and some consumer credit deterioration, American shoppers have continued to spend at a relatively steady pace, on average, over the past several months. This trend is predicted to continue for the balance of the year, before accelerating sometime in 2008.
Jewelers can expect to see solid sales gains in the upcoming November-December holiday selling season, though we do not expect to see record sales increases this year.
Jewelry demand closely correlates to growth of the U.S. Gross Domestic Product (GDP); most forecasters are calling for only a moderation of GDP growth in 2007, not a full-fledged recession. In 2008, predictions indicate that the pace of GDP growth will accelerate.
IDEX Online Research continues to believe that U.S. jewelry sales will rise by over 4 percent this year, somewhat below last year’s 6.5 percent increase, but well above sluggish growth levels which the industry experienced earlier in this decade.
Media Headlines Overstate Consumer Problems
Once again, the media has overplayed the consumer credit crunch, overstated financial market turmoil and misinterpreted the role of consumer confidence in the American market.
Here is our view of what is happening in the U.S. consumer market:
- Economic growth is a major determinant of consumer spending – Which comes first – economic cyclicality or consumer spending? It doesn’t matter; they tend to move together. Thus, the Fed properly intervened recently and cut the discount rate (the inter-bank lending rate) when it became clear that economic growth was threatened by uncertainty in the financial markets. Essentially, the Fed is pouring money into the American economy.
- The much-ballyhooed credit crunch is affecting only a small percentage of American consumers – Despite broad sweeping statements by the media, only a small percentage – both measured by number of borrowers and by value – of American mortgages are in trouble. These folks were not buying jewelry, so we won’t miss them in our stores this year. On average, about 24 in 100 households shop for fine jewelry in any year. Consumers with serious credit problems are among the 76 percent of American households which are not even entering jewelers’ stores.
- Interest rates are headed lower – Long term mortgage rates have turned solidly downward in anticipation of easing of interest rates by the Fed between now and the end of 2007. The Fed has indicated that it plans to ease rates. Thus, consumers with adjustable rate mortgages (ARMs) won’t feel as much pain as some forecasters had anticipated. The interest rate on many credit cards is tied to the prime rate; as the prime interest rate falls, the cost of carrying credit card balances will also moderate.
- Jobs are still being created – While the housing industry has shed jobs, other industries have created more jobs than have been lost so far this year.
- Corporate profits are strong – Corporate profits are at record levels in many industries, driven by both domestic demand and export sales. With the U.S. dollar very weak, American-produced goods are attractive to overseas buyers. As long as profits remain strong, the financial markets are expected to recover later this year.
- There are consumer risks – Job creation has slowed, even though unemployment levels remain very low. The consumer debt burden is very high, and the consumer savings rate is non-existent. Consumer wealth levels are threatened by the declines in the stock market and softness in the housing market.
- Inflation remains low – Core inflation in the American market has receded from higher levels late last year, as businesses are reluctant to implement price increases in the face of economic headwinds. Even in the jewelry industry, inflation has moderated, as the graph below illustrates.
U.S. Consumer Price Index for Jewelry |
- Worst-case scenario unlikely – If energy prices were to spike upward for any reason, consumers’ discretionary spending would be negatively affected. Further, if the value of the U.S. greenback collapses, inflation would soar, putting pressure on consumer expenditures. We believe that there is less than a 5 percent chance that either of these scenarios would occur in 2007 or 2008. If a worst-case scenario occurs, it would likely affect consumer spending for only a short time. Even after the horrific events of 9/11, consumer spending rebounded to pre-9/11 levels within six months. Other major dislocations affecting consumers have typically had much less impact on their spending.
- Wall Street’s woes won’t spill over onto Main Street – Incipient panic reigned over the U.S. financial markets earlier this month. No wonder: some hedge funds blew up, sub-prime mortgage lenders came close to collapse, and stocks fell. Are we headed for “the big one” this time? The U.S. economy is too well tuned to collapse. So what is happening? In his 1873 book, “Lombard Street,” British financial journalist Walter Bagehot described how fear spreads in financial circles: “Incipient panic starts with a ‘vague conversation.’ As panic grows, it becomes more intense and more diffused, [attacking] more persons more virulently.” At times such as these, Bagehot says, “men of experience” bolster their positions. When fear replaces greed in the financial markets, Bogehot knew what to do: “if central banks lend freely, the panic will pass.” One hundred and thirty years later, Bagehot’s words ring true again.
- Consumer confidence is not a predictor of consumer demand – As illogical as it may seem, consumer confidence and consumer sentiment do not correlate to consumer demand or retail sales. The Conference Board, which publishes the highly reliable Consumer Confidence Index, specifically notes that the Consumer Confidence Index is not a reliable indicator of consumer demand.
- Shopping is ingrained in the American culture – There’s an old adage: Americans are born to shop. Whether we agree with this statement from a moral viewpoint or not, we believe it is true. There are many variations of this adage: “Baseball may be this country’s national pastime, but shopping is its passion.” Another one is “When the going gets tough, the tough go shopping.” Americans invented recreational shopping. Americans go shopping for many other reasons than to buy something. The go shopping for socialization (to see and be seen), recreation (fun in the mall), and for tactile reasons (to touch and feel the merchandise before they buy it – Americans are “tire-kickers”). Some psychologists contend that shopping is a form of therapy for Americans. Consumers aren’t going to stop consuming.
No Notable Spending Slowdown So Far
In particular, jewelry retail sales remain sound, with moderate gains in line with economic growth.
- Jewelry retail sales are in line with expectations – While jewelry sales gains have moderated from last year’s extremely strong pace, they remain in line with expectations. In fact, they appear to be stronger than we would have predicted, based on economic forecasts for the American economy. The graph below illustrates monthly jewelry sales trends for the past three years in the U.S. market. If U.S. jewelry sales follow the current trend, the 2007 annual industry sales gain – +4.4 percent – is expected to be greater than the gain in 2005 – +3.8 percent.
Jewelry Sales Trends
All Jewelry Sales & Specialty Jewelers' Sales
Source: US Dept. of Commerce
- Credit still available for jewelry purchases – Retail jewelers tell us that they have seen a modest increase in credit rejections by the third party credit providers who offer the most attractive credit terms. However, most jewelers have been able to save the sale by going to secondary and tertiary credit providers who make credit available, though at a higher interest rate or with other more onerous terms.
IDEX Online Jewelry Sales Forecast Show Upward Bias
We raised our forecast for jewelry sales in the U.S. market for 2007 for the second consecutive month in early August. Forecasters are suggesting that the U.S. economic slowdown won’t last as long or as deep as first anticipated earlier this year. While economic growth in the first quarter was an anemic +0.7 percent, most forecasters are calling for overall economic growth for the year of 2 percent or more.
As a result of revised economic expectations, we have raised our forecast another 20 basis points from our early August forecast. We are now predicting that jewelry sales in the U.S. market in 2007 will rise by +4.4 percent over 2006’s level. We maintain a range of +4.0-4.5 percent for our forecast.
The graph below summarizes actual and estimated jewelry sales trends for the U.S. market by year.
U.S. Jewelry Sales Gains |
The Key Question: “Are You A Person of Experience?”
Bagehot’s comments (above) are relevant today. When uncertainty reigns, we tend to pull back. As one Wall Street colleague noted, “Never try to catch a falling knife.” But this isn’t a falling knife. This is an opportunity for jewelers. Consumers will continue to spend. As a retail jeweler, will you get your share, or will you miss the opportunity?