According to ICSC, chain store sales continued their weak start to 2011. In the latest week, sales fell 1.2% although year-over-year growth improved to 2.8%.  This was the third straight decline and the second largest one and since wintry weather has hit us (again), the inclement conditions were to blame for the weakness.  While growth of 2.8% was the second weakest in seven weeks, it was well above the prior week's 1.4%.


As a result of the weakness, the ICSC lowered its forecast for growth in January to about 2%. It was previously forecasting growth of about 2.5%, below December's 3.1% and the slowest growth since October.  Consistent with our view of consumer spending in 1H11, comparisons remain difficult.  While the Social Security tax cut provides upside risk to this outlook, the timing depends on how quickly the changes can be implemented.


On the positive side consumer confidence rose in January to the highest level in eight months! The Conference Board’s index of sentiment increased to 60.6 from a revised 53.3.  While this is a net positive today, a continued improvement in optimism and an improving labor market are needed to keep the momentum going. 


Is it sustainable?


Working against the potential for continuous improvement in confidence and consumer spending are declining home prices.  As our Financials analyst, Josh Steiner, noted in a note this morning, home prices are falling and he expects this to persist at an accelerating year-over-year rate through July 2011, and will continue to fall in absolute terms thereafter.


While the sales numbers may have been slowed by snowy weather in large parts of the country, overall sales trends remained constrained by weak-but-improving consumer fundamentals.  Specifically, the moderation in private sector job growth in the last two months highlighted that the labor market remains a drag on spending despite the drop in unemployment in December.


Meanwhile, wage income is generally improving, but only gradually and from a low base and most consumers are, voluntarily or involuntarily, not accessing credit to finance consumption.  As a result, expedited improvement in the labor market is needed to generate the necessary wage income to support spending.


Inflation is also a risk.  Gasoline prices continue to rise and are a drag on spending.  The average price gasoline has risen for eight straight weeks and was $3.16 per gallon last week.  Higher energy prices particularly hurt lower-income households who spend more disposable income on energy needs.


One of the key tenets of our Consumer Cannonball theme was the phasing out of government supported income payment.  While the government contribution to income growth dropped to essentially zero at the end of 2010, this has changed in early 2011 when Social Security withholding declined as a result of the tax bill. 


It is now consensus that sales growth in 2011 will accelerate thanks to the renewed government support.  Despite the uptick in confidence, weak fundamentals will remain a constraint and the government support will have a fading impact as we go through 2011, keeping consumers cautious and putting a governor on growth.  Furthermore, the decline in home prices is likely to dampen sentiment, particularly in the event that rates increase.


Despite today’s uptick in confidence, consumers will not lead the recovery in the near or intermediate term.


Howard Penney

Managing Director


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