Tag Archives: consumer spending

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Rising gas prices could curtail consumer spending

Higher gas prices are crimping consumer spending and slowing the already-weak U.S. economy. And they could get worse in the coming months.

The Federal Reserve this week took steps to boost economic growth. But those stimulus measures are also pushing oil prices up. If gas prices follow, consumers will have less money to spend elsewhere.

The impact of the Fed’s actions “is likely to weigh on the value of the U.S. dollar and lift commodity prices,” said Joseph Carson, U.S. economist at AllianceBernstein. “We would not be surprised if (it) fueled more inflation in coming months, squeezing the real income of U.S. workers.”

Americans are already feeling pinched by high unemployment, slow wage growth and higher gas prices.

Consumers increased their spending at retail businesses by 0.9 percent in August, the Commerce Department reported Friday. But that was largely because they paid more for gas. Excluding the impact of gas prices and a sizeable increase in auto sales, retail sales rose just 0.1 percent.

Perhaps more telling is where Americans spent less. Consumers cut back on clothing, electronics and at general merchandise outlets — discretionary purchases that typically signal confidence in the economy.

Gas prices have risen more than 50 cents per gallon in the past two months. The national average was $3.87 a gallon on Friday. Most of the increase took place in August, which drove the biggest one-month increase in overall consumer prices in three years, the Labor Department said Friday in a separate report.

“Consumers were not willing to spend much at the mall since they are feeling the pump price pinch,” said Chris Christopher, an economist at IHS Global Insight.

Weaker retail sales will likely weigh on growth in the July-September quarter. Economists at Bank of America Merrill Lynch slashed their third-quarter growth forecast to an annual rate of only 1.1 percent, down from 1.5 percent. That’s not nearly fast enough to spur more hiring, which has languished since February.

The Fed is hoping to kick-start growth with a series of bold steps announced Thursday that could make borrowing cheaper for years.

It plans to spend $40 billion a month to buy mortgage bonds to make home buying more affordable. It also pledged to keep short-term interest rates near zero through at least mid-2015.

And Fed Chairman Ben Bernanke said the Fed will continue its efforts — and intensify them if necessary — until the job market improves “substantially.”

The announcement ignited a two-day stock market rally that sent the Dow Jones industrial average to its highest level since December 2007, the first month of the Great Recession.

But the Fed’s actions also helped move oil prices briefly above $100 a barrel Friday for the first time since May. They fell back slightly, but were still up 74 cents to $99.04 a barrel in mid-afternoon trading.

Carson noted that the Fed’s previous rounds of bond-buying pushed up commodity prices and fueled greater inflation. That weakened the ability of U.S. consumers to spend and likely slowed growth, he said.

He expects the same thing to happen again.

The Fed’s moves can push up oil prices in several ways. The Fed creates new money to pay for its mortgage bond purchases. That increases the amount of dollars in circulation and can lower their value. Oil is priced in dollars, so the price tends to rise when the dollar falls. That’s because it costs more for overseas investors to purchase dollars to buy oil.

Lower interest rates also push investors out of safer assets, such as bonds, and into riskier investments, such as oil, in hopes of a greater return. And if the Fed’s moves accelerate growth, that would increase demand for oil and gas and also raise their prices.

Higher gas prices are eating up a bigger share of Americans’ incomes than in previous years. Spending at the pump accounts for 8.2 percent of the typical family’s household income, according to Fred Rozell of the Oil Price Information Service. That’s just below last year’s 8.3 percent.

Those represent the biggest slice of household income spent on gas since 1981. The typical household spends about $342 per month on gasoline. Before gasoline prices began rising in 2004, households spent less than $200 per month, Rozell said, under 5 percent of median income.

Average gas prices are higher this year than last year. But Americans are using less by driving more fuel-efficient cars and driving less.

Meanwhile, average wages, adjusted for inflation, have been flat for the past year, the Labor Department said Friday. That adds to the squeeze on consumers.

One silver lining is that weakness should eventually push prices back down, economists note. That’s because people cut back on oil and gas consumption when prices rise.

“Unless the economic data rapidly improve, the gains in oil … prices are unlikely to be sustained,” Julian Jessop, an analyst Capital Economics, said.

Consumer Confidence

Consumer Confidence In The New Year Will Influence Buying Decisions

Employment and real estate prices have regularly influenced our economy over the last century. Recently, they have negatively compounded the economic crisis and will most likely continue to be an issue as we fight through to recovery.

What will it take to change the direction of unemployment and low real estate prices? It begins with corporate confidence and consumer spending. Due to the challenges we currently face, many corporations have held on to large amounts of cash. Until corporations feel the worst is behind us and start deploying their large cash reserves, we will see a delay in our recovery. These large cash reserves will be used for research and development, marketing, and most importantly, hiring. Over time, people’s confidence will increase due to hiring, and as this happens people will begin to tap into their savings to start buying goods and services such as clothes, small home appliances, automobiles and vacations.

As more time goes on and we experience improvement with unemployment, people will begin to feel more confident and see the opportunity to invest in the markets. Doors will open for new opportunity for individuals to consider buying homes again. People who thought that owning a home was once out of their reach can now afford to buy. Home buying will certainly increase as we see unemployment decrease, which will benefit most of us — as long as we don’t get greedy again. Slowly, both will recover. Unemployment will most likely come down before real estate goes back up.

Everything is cyclical. Eventually, low unemployment and higher real estate prices will help the economy again. How long will it take? We don’t know. Recovery from a crisis such as the recent recession will take longer than we think. Be patient and use the knowledge we have learned from this recession to plan appropriately for the next crisis.

After A Long Recession, Over-Spending May Be Tempting

After A Long Recession, Over-Spending May Be Tempting, But Consumers Beware

The desires of the American consumer have changed over the last few years. This concept is not difficult to imagine since the United States has suffered it’s worst economic downturn since the Great Depression. People have been forced to appropriately distinguish the difference between needs and wants.

Prior to the recession, the American consumer was living an unsustainable lifestyle while real estate prices were escalating. People were spending money as if they had their own personal printing press. In reality they did, it was called a home equity line of credit. Excess access to money created an irrational consumer, one who boasted of the ability to customize goods, cars, clothes, jewelry, etc. Consumers got to the point where they became addicted to the process of buying something new, just because they could.

Today, most people feel the opposite; they have a new respect for money and they feel that less can be more and that frugality is the new chic. Perhaps a near-death experience, economically speaking, is just what the consumer needed in order to fully respect the tremendous responsibility of proper money management.

Unfortunately, many people have a short-term memory. They will quickly forget their valuable lessons as the economic landscape slowly improves. They will feel they sacrificed when they had to, but now that things are economically improving, they will feel they can reward themselves. As wrong as this rationale is, millions of consumers will have a sense of entitlement as we enter this holiday season.

Target, the nation’s second-largest retail chain, told the Financial Times recently that it predicts this holiday season should be its best in three years. Target bases its prediction on the enormous pent-up demand of the consumer.

Consumer spending of course is a double-edged sword. On one hand, you want consumers to spend; they represent 66 percent of the nation’s GDP. On the other hand, you want Americans to save more because it creates more economic stability.

This holiday season will be interesting to follow. My hope is that the consumer spends prudently and does not fall back into the same spending trap as before.

Coins

Can the Savings Rate Save America?

The financial norms of our society have changed considerably over the past five years. Assumptions surrounding retirement, investment returns and job security have all changed 180 degrees.

Perhaps this recession has been so monumental that it will permanently change the old norms and embrace a new realistic standard. Will this crisis create a new generation of Americans that look at money and entitlement similar to those who lived through the Great Depression?

Prior to this current recession, many people were living a lifestyle that was beyond their means. The Bureau of Economic Analysis stated that in 2005, America was only saving approximately 1 percent of its income. For many, the need for consumption of goods and services dominated their paychecks, so much so that they exhausted their savings accounts, ran up credit card balances and stripped the equity from their homes. You could say that America was living an era of overindulgence.

Today, it seems that people appreciate and respect their money more than they have over the past few decades. If they are currently employed, they are grateful to be able to provide for their families, as well as make sure that every dollar is stretched to its full potential.

Consumers now realize that when economic times become difficult, they cannot depend on banks to lend them money. This is why America is now saving more that 6 percent of its income — we are preparing for the unexpected and unknown.

In my opinion, the more people save, the stronger our economic landscape will become over time.

Of course many economists and Wall Street banks would love for consumers to return to their old spending habits, which would create a quick and bliss recovery.  Our economy is dependent on consumer spending and statistics have shown that the American consumer represents approximately two-thirds of the nation’s Gross Domestic Product. Unfortunately, the fundamental problem of overindulgence would not be addressed if this were to happen. We would only be setting the stage for another crisis in the future.

Fundamentally, it is beneficial to our financial system that Americans are saving more. It is unrealistic to assume that the United States economy will bounce back quickly; it will most likely take a number of years and still produce a high level of discomfort.

A slow recovery is acceptable as long as the consumer continues to make smarter decisions financially and attempts to avoid past mistakes. Perhaps if this positive trend continues, could our country’s best years still be ahead of us?

Projections

Fewer Jobs Will Be Lost This Year, But Growth Will Remain Slow In 2011

In an updated forecast released today, the Arizona Department of Commerce Forecast reports that the state’s nonfarm job losses for 2010 have been revised downwardly. The department now forecasts that the state’s economy will lose 25,700 jobs this year, as opposed to the 50,400 originally forecast. However, the department also revised its forecast on how many nonfarm jobs Arizona’s economy will create in 2011, from 23,100 to 16,500. The fact that Arizona will be losing fewer jobs this year is being attributed to:

  • Federal government economic stimulus program spending that began in 2009.
  • Continued employment growth in the education and health services sector.
  • Improved job growth in the professional and business services; trade, transportation, and utilities; leisure and hospitality; and natural resources and mining sectors.
  • Stronger than anticipated global economic growth.


The downward revision in 2011’s job growth rate is being attributed to:

  • Tepid growth in the private sector due to sluggish business and consumer spending.
  • Large state and local government budget deficits.
  • A slowdown in population growth.
  • Limited consumer and small business lending by banks.


Gains in five sectors and losses in six sectors are expected over the two-year period (2009 to 2011). The major sectors in the Arizona economy where job gains are forecast include: educational and health services; professional and business services; trade, transportation and utilities; leisure and hospitality; and natural resources and mining. Sectors with projected job losses during the same time period include: government; construction; financial activities; information; manufacturing; and other services.

Arizona Sector Employment
Average Annual Over-the-Year Change


2009

2010

2011

Total Nonfarm

-7.3%

-1.1%

0.7%

Manufacturing

-11.6

-3.0%

1.3%

Natural Resources/Mining

-17.8%

1.8%

12.3%

Construction

-30.8%

-11.8%

1.8%

Trade, Trans. & Utilities

-7.1%

0.6%

0.6%

Information

-6.4%

-6.4%

-2.9%

Financial Activities

-5.0%

-3.2%

-1.6%

Professional & Business Svcs

-10.4%

-0.3%

2.8%

Educational & Health Svcs

2.7%

2.6%

1.8%

Leisure & Hospitality

-5.2%

0.4%

0.8%

Other Services

-6.6%

-2.1%

2.0%

Government

-2.2%

-1.8%

-1.9%


Total Nonfarm Employment
Annual Average Growth Rate

2009

2010

2011

Arizona

-7.3%

-1.1%

0.7%

Phoenix MSA

-7.9%

-1.0%

0.8%

Tucson MSA

-5.1%

-1.1%

0.4%

Rest of State

-6.4%

-1.1%

0.6%

Charles Miscio, a senior vice president at Colliers International

Could The Current Real Estate Mess In Arizona Have Been Prevented?

A few short years ago, when Arizona’s residential market was really cooking, Charles Miscio was getting his teeth cleaned when his dental hygienist made an ominous comment: She owned eight houses and was renting them out to investors, speculators and anyone in between.

“It seems like everyone got caught up in that irrational thinking,” says Miscio, a senior vice president at Colliers International, who has more than 20 years of experience in the Arizona real estate market. “The train had left the station and no one thought it would stop. Well, it took some major missteps by Wall Street, but I think everyone can agree that money train has stopped.”

Fortunately, Miscio adds, Arizona did learn some lessons from past real estate market cycles, and things, especially in the commercial sector, should begin to look better following another nine to 12 months of uncertainty.

“Mid-2010 is what we as brokers are looking toward for recovery,” he says.
Right now, real estate executives and economic experts concede, a credit crunch, plummeting home values and corporate uncertainty have consumer confidence at historic lows. Companies aren’t expanding, leasing or buying more office space or hiring workers. Consumers, in turn, are wary about their jobs and have resisted spending on everything from new cars to health care.

It begs the question, though: Could anything have been done to prevent the current malaise?

Miscio says perhaps those with business ties to real estate (finance, mortgage, brokers, developers, etc.) should have watched the indicators better and kept a skeptical eye on the ever-outreaching building patterns. Developments continually moved to the periphery of the desert, making long commutes a norm for many and impacting the quality of life for many more. Exotic financial structures, which seemed too good to be true, also emerged. As it turns out, reality eventually set in.

“We just need to pinch ourselves once in a while,” the Colliers executive says.
Pat Feeney joined CBRE in 1985, and has ridden many waves in the market. Today, he is a senior vice president dealing mostly with industrial projects. He says current action in all sectors is down, and like, Miscio, he believes any improvement is closely tied to the replenishment of consumer confidence. That could take a while, as the Conference Board’s Consumer Confidence Index, a widely watched gauge of consumer spending, continues to fall to all-time lows. Currently, confidence in the economy is the lowest on record.

Feeney has seen these cyclical patterns before and believes, in the end, this too shall pass; it’s just a matter of time, although there are a few caveats in this current cycle.

“Historically, cycles come and go — the wounds heal and everyone goes back into battle,” he says, adding that past cycles were always followed with an “oomph factor.” That “oomph” was the Internet and tech boom earlier this decade, and the housing boom of the mid-2000s.

“Where is that next oomph?” Feeney asks, citing comments made by an economic analyst at a national economic strategy session.

“…it took some major missteps by Wall Street, but I think everyone can agree that money train has stopped.” — Charles Miscio, Colliers International

“This dramatic improvement also needs to be worldwide, since all of our economies are tied together. I agree with the cyclical thought process; I just think this one will take longer. I just don’t know how long.”

Several things from past booms are playing a huge role in the current bust. A run-up in the cost of land over the past decade held the lid on the market, as did escalating construction and material costs. Some key zoning changes, mostly around Sky Harbor International Airport, have also equated to a real estate industry that could be much worse off.

“This time around, there wasn’t unbridled and uncontrolled activity,” Feeney says. “This was more economically controlled and driven.”

Like many, Feeney remains bullish on Phoenix. People will always want to escape the inclement areas of the U.S. and the congested and strange factor of California. Arizona is a great place to live and affordable housing, one way oranother, will return.

Jerry Noble, a first vice president at CBRE agrees: “Phoenix continues to grow and be a leader in U.S. growth. We have always seen dynamic employers looking for space in quality locations with an affordable work force. Our fundamentals just need to stabilize and we’ll get back to where we need to be.”


www.cbre.com
www.colliers.com