The Retail Sector Outlook Nigel Gault Group Managing Director North American Macroeconomic Services FTA Revenue Estimating Conference Raleigh, North Carolina September 17, 7 Copyright 7 Global Insight, Inc. Retail Sales Growth Has Already Slowed And Will Slow Even Further in 1 9 7 3 (Nominal retail sales, year-over-year percent change) 1 3 7 9 Copyright 7 Global Insight, Inc. 9/7 1
Recent Evidence: Volatile Items 1 1 - -1-1 Retail sales, percent change on year earlier Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Autos Gasoline Building Materials Copyright 7 Global Insight, Inc. 9/7 3 Recent Evidence: Other Retail Sales 1 9 7 3 1 Retail sales, percent change on year earlier Jan- Apr- Jul- Oct- Jan-7 Apr-7 Jul-7 Total Ex-Autos, Gasoline, and Building Materials Copyright 7 Global Insight, Inc. 9/7
Some Good News: Consumer Sentiment Is Not Near Recession Levels 1 11 1 9 7 Reuters/Michigan Sentiment Index 197 19 19 199 199 199 Copyright 7 Global Insight, Inc. 9/7 Cross-Currents Affecting Consumer Finances Positive Forces Job Growth (now at risk) Rising Wage Rates Moderating Inflation Negative Forces Declining Home Sales Declining Housing Wealth Mounting Debt Burdens Low Saving Rate Copyright 7 Global Insight, Inc. 9/7 3
The Consumer Markets Environment (Percent change unless noted) 7 9 Real Consumption 3.1.9.3. Real Disposable Income 3.1 3. 3.1 3.1 Real Household Net Worth.3 1.7 -.1 1. Payroll Employment 1.9 1.3. 1.1 Real Wage Rate.1 1.1.9.9 Consumption Price Deflator..3 1. 1.9 Light Vehicle Sales, millions 1. 1.1 1.1 1.3 3-Year Mortgage Rate, %..3..7 Copyright 7 Global Insight, Inc. 9/7 7 Housing Wealth Has Supported Consumer Spending (Percent of household disposable income) 1 1 19 193 19 199 199 199 199 1 7 Housing Wealth Housing Equity Mortgage Debt Copyright 7 Global Insight, Inc. 9/7
Mortgage Equity Withdrawal Has Been Fueling Consumer Spending, and Is Fading 9 7 3 1 (Percent of disposable income) 199 1993 199 199 199 1997 199 1999 1 3 7 Q1 Net Equity Extraction Source: Federal Reserve - Kennedy/Greenspan data updated as of June 7 Copyright 7 Global Insight, Inc. 9/7 9 Some Evidence on Use of Funds in Refinancings Federal Reserve Survey of use of funds in 1/ refinancings Share of Dollars Home Improvements Repayment of other debts Consumer Expenditures Stock market or other financial investment Real estate or business investment Taxes 3% % 1% 11% 1% % Copyright 7 Global Insight, Inc. 9/7 1
Gasoline Hit Probably Peaked in Q 37 3 (Billions of dollars, annual rate) (Dollars per gallon) Every 1 cents on the pump price costs consumers $1 billion per year (.1% of disposable income) 3. 3. 3. 3. 7. Q1 Q Q3 Q 7Q1 7Q 7Q3 7Q Q1 Q Q3 Q Consumer Spending on Gasoline and Motor Oil (Left scale) Pump Price of Gasoline, all grades (Right scale). Copyright 7 Global Insight, Inc. 9/7 11 Some Rebuilding of Savings Is Likely. 3. 3... 1. 1... (Percent growth, real) 7 9 Real Consumption Real Disposable Income Copyright 7 Global Insight, Inc. 9/7 1
Real Consumer Spending on Durables Is Cyclical (Percent change, chained dollars) 1 3 7 9 Durable Goods Nondurable Goods Services Copyright 7 Global Insight, Inc. 9/7 13 Spending on Home Furnishings Will Be Hurt by the Housing Downturn 1 1 - -1 (Percent change, year-over-year, real dollars) -1-19 1991 199 1997 3 9 Consumer Spending (Furnishings ex. computers and software) Residential Fixed Investment Copyright 7 Global Insight, Inc. 9/7 1 7
Nominal Consumer Spending Shifts to Services Medical Care & Products Recreation Services Food & Beverages Transportation Services Computers & Software Apparel Vehicles & Parts Home Furnishings (Percent change, current dollars) - - - 1 7 Copyright 7 Global Insight, Inc. 9/7 1 Shift From Goods To Services Accelerates (Share of consumer spending on goods)..1.1...39.39 1 3 7 9 Copyright 7 Global Insight, Inc. 9/7 1
Bottom Line Consumer fundamentals have weakened The home equity pump is being turned off Retail sales growth will decelerate further Cyclical items will lead the way down especially home-related goods The downward trend in the share of goods spending will accelerate Copyright 7 Global Insight, Inc. 9/7 17 Thank You! Visit our Web site at www.globalinsight.com Copyright 7 Global Insight, Inc. 9/7 1 9