US consumers seem to be entering the all-important holiday shopping season with a frugal mindset.
Total consumer spending grew by 2.9% in September, virtually even with August, and well below the 5% average monthly increases seen in the first half of 2011. By all accounts, the back-to-school season, often a harbinger of holiday success, was a weak one for the retail sector.
Much of the cautiousness seems to be due to sluggish income growth. Personal disposable income increased by 3.7% in September, below August’s 3.8% growth rate, and slower than the monthly increase seen in 2012.
After October’s nine-point plunge in the Consumer Confidence Index, the biggest one-month decline in the measure in two years, it’s clear that Americans are discouraged over the sluggishness recovery of the economic and job market, and the lack of leadership in Washington exemplified by the two-week government shutdown. The relatively slow pace of job recovery is putting tremendous downward pressure on salaries and labor rates, and most Americans have reacted by reining in spending and seeking value wherever they can. The disastrous launch of Obamacare and uncertainty about future health care cost burdens will only exacerbate an already tenuous situation.
People are saving more of their income again, too. Personal savings has been slowly rising, and totaled $620 billion in September, resulting in a personal savings rate of about 4.9% of disposable income, above 2012’s average monthly level of just over 4%.
A big portion of the increased spending has been on durables, particularly autos, as many Americans have opted to replace aging vehicles. A steady decline in crude oil and gasoline prices is also helping this category. This has taken dollars away from other discretionary categories like apparel, accessories, beauty products and gifts. Most retail economists expect this strength in the auto sector to persist through 2014.
Without big increases in their paychecks, but able to save on groceries and gas due to drops in commodities prices, consumers have been able to take advantage of the many discounts and other promotional deals waiting for them at the mall. However, given the low level of consumer confidence about the future, spending growth in these categories has been low, since consumers are not increasing their units purchased. They’re merely taking advantage of promotional prices. Spending on apparel and footwear, which comprises just over 3% of total consumer spending, rose by 2.4% a 12-month smoothed basis in September. Spending growth in apparel (2.3%) outpaced that of footwear (1.8%).
Consumers are using more cash and debit cards, and putting fewer purchases on credit cards. Although consumers have stopped deleveraging, or paying down credit card debt, they haven’t increased their use of plastic very much: monthly increases in credit card debt have been negligible for the past two months.