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04/18/2013

So Goes the Consumer...

It seems American consumers have begun to feel the impact of the expiration of the payroll tax cut, fluctuating gasoline prices, delayed tax refunds, and increased health insurance premiums as evidenced by the U.S. Census Bureau’s advance retail sales estimates for March. The report showed a disappointing decline of 0.4 percent from the previous month, and the year-over-year increase for the first quarter of 2013 was 3.7 percent—the slowest quarterly increase since the national economic recovery began in 2009. Will the consumer bounce back, and why is it important to overall economic conditions?

Reports have indicated that consumers are beginning to pull back and readjust to the change in their paycheck. Many have opted to eliminate some of life’s “luxuries,” with the casual-dining sector taking a huge hit as increasing numbers of folks are staying home and cooking their own meals. Recent discussions with District contacts indicate that casual dining is limping along, having experienced the fourth consecutive year of decreased traffic. To combat this trend, some major restaurant chains are offering incentives to bring the customer back (including my personal favorite—the “buy one, take one” entrée deal!).

Not all segments of the retail industry have experienced the same decline as casual dining and are actually remaining somewhat upbeat. Some of our contacts have mentioned that salary-increase programs are being restored and this move, along with rising home values and equity prices, are having a positive impact.

Jack Kleinhenz, chief economist for the National Retail Federation, recently addressed the Atlanta Economics Club and explained the importance of consumer activity in the overall economic outlook:

Consumer spending accounts for nearly 70 percent of GDP. A stronger outlook for the economic growth requires stronger consumer spending, and for this to happen we need lower unemployment, higher wages, and an increase in credit.

Dr. Kleinhenz also discussed how recovering home values may lead to an increase in consumers’ ability to spend, noting that consumers’ willingness to spend is also key. While job security is rising—that is, workers’ belief that their job is safe—expectations regarding the economy and their own individual finances are still uncertain. Therefore, consumption increases depend on the improvement of consumers’ overall confidence.

Photo of Christine VietsBy Christine Viets, a Regional Economics Information Network analyst in the Atlanta Fed’s Jacksonville Branch

April 18, 2013 in Economic Growth and Development, Retail | Permalink

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