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An index established by Deloitte Touche to track consumer spending on durable goods offers a less than positive outlook. Called the Deloitte Leading Index of Consumer Durables Spending, it showed a decline for three consecutive months. It has been accurate 72 percent of the time between January 2004 and July 2007, accurately forecasting changes in personal consumption expenditures on durable goods for 31 months out of the past 43 months. "Based on our analysis, the index turned negative in November 2006 and continued sliding until May 2007, said Ira Kalish, director of global economics and consumer business for Deloitte Research and author of the index.

"It rebounded for a few months but turned downward again in September, October, and November," he said. "When the index moves in one direction for two or more consecutive months, it has been shown to accurately predict the movement in the PCE-D, or Personal Consumption Expenditures on Durables.

"Consequently, the recent three month decline in the index augurs continued weakness in consumer spending on such items as consumer electronics, furniture and home furnishings, appliances, cars, home improvement products and other big ticket items," Kalish said.

"The index's weakness is in line with general expectations about the economy, and underscores that consumer product companies will face a tougher market share battle in the coming months," added Pat Conroy, Deloitte's US consumer products leader. "Companies are at a critical juncture as they try to differentiate their products in a crowded and transparent market.

"Cost containment, margin preservation, and brand loyalty are all under attack from an increasingly empowered consumer. Successful companies will focus on building strong, differentiated brands in order to forge strong relationships with both major retail customers and consumers," Conroy concluded.

The index is composed of four components: consumer price index, initial unemployment claims, real wages and new homes sold. The first captures the negative effect of rising prices on nominal spending on durables. Initial claims for unemployment insurance captures the effect of the labor market, because a rise in unemployment insurance claims leads to a decline in spending on durables.

Real hourly earnings captures the positive effect of rising income on willingness to spend on durables. And new single family houses sold captures the positive effect of the housing market on durables spending, with a six month lag.

The index declined steeply in November due to an upsurge in initial unemployment claims, an increase in the Consumer Price Index, the lagged effects of a weak housing market, and particularly a decline in real hourly earnings. The decline in hourly earnings is due to the fact that increased inflation overwhelmed a nominal increase in wages.

Article ID: 508