Consumer Buying Behavior Outlook

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All bets on retail sales momentum for 2004 and beyond got trickier last week, as June numbers took a steeper dive (1.1 percent) from month earlier levels than economists earlier had forecast. Whether consumers will continue to spend their way to a full and sustainable economic recovery gets a mixed read among retail analysts and economists, even as retail industry groups raised their bar of cautious optimism, the National Retail Federation upping from 5 percent to 6 percent its prediction for annual retail sales growth in 2004.

What was clear after the Commerce Department reported the largest month to month drop in sales in 16 months, was that consumer buying behavior, whose spending accounts for two-thirds of GDP, is in question.

The focus becomes, "What will consumer spending be for the second half of 2004?" The answers are difficult, given that the reasons attributed for the exuberance tracing back to the 3rd Quarter of last year never completely explained the surge. Job gains, tax breaks, mortgage refinance gains, etc. served to contribute to higher spending among consumers, but hardly explained the 9 percent gain in sales for the first five months of 2004, versus a 5 percent gain during the same time period in 2003.

Likewise, although expectations are for a more subdued consumer spending performance in the next 7 months, it's impossible to determine exactly why. The specter of terrorism continues; higher interest rates loom; inflation has emerged as a possible factor; and unemployment could go either way; so, even in an election year, there are lots of risks to sales gains that could rear up. Tempering the pessimism in the outlook, economists expect a gust of sales activity around providing back-to-school items for some 67 million kids ages 4 to 21, who'll head to schools (kindergarten through undergraduate school programs) this fall, and among car dealers and manufacturers who heat up their incentive programs during summer months to make room for new fall models.

If these negative scenarios fail to exert much of a drag on the economy and consumer psychology, there are underlying demographic patterns that suggest that growth will continue well into 2005. For example, households headed by 45- to 54-year olds -- the No. 1 age cohort for both peak earnings levels and consumer spending -- are still a growing segment. Perhaps that's why, even as we experienced a recent two-year period of almost non-existent job growth and uncomfortably high unemployment, consumers continued to spend on new houses and other big-ticket items, increasing retail sales by 7.7 percent from 2001 to 2003.

It also appears that asset sales, investment income and self-employment income might be emerging an off-the-radar influence on consumer expenditure levels and confidence, and there is no reason to expect those factors to lessen in importance as the economy moves into the 2nd half of 2004.

Economists and retail analysts are split as to whether the June retail sales decline should be characterized as a speed bump or a phenomenon more worrisome than that. Almost all, however, expect retail sales gains to exceed the 3 percent gain in 2003, with estimates ranging between 4.5 percent and 6 percent.

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