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Consumer Confidence Dips in October, But Rises for Holiday Season

Optimism tempered with caution, thriftiness

By Mark Huffman and James Limbach
ConsumerAffairs.com

October 30, 2009

The University of Michigan Surveys of Consumers index of sentiment for October dropped to 70.6 from 73.5 in September, which was its high for the year. However, gas prices were at least 20 cents a gallon cheaper last month.

The report notes that consumers' outlook has recovered along with the economy over the last 12 months, but continues to be affected about concerns over their personal finances. A majority of those questioned in the survey said their personal financial situation had gotten worse this month.

The outlook for the future, for most of those surveyed, also remains on the dark side. The Consumer Expectations Index dropped five points with half of those surveyed saying they expect the unemployment rate to remain around its current level of 9.8 percent, a 26-year high.

Spending declines

With the drop in consumer sentiment, it is perhaps no surprise that consumers remain cautious in how they spend their money. Consumer spending fell 0.5 percent in September after a jump in August, which was boosted by the government's Cash for Clunkers program. It was the first drop after month months of gains, which seemed to mirror the recovery of the stock market.

Americans' wages and salaries fell by 0.2 percent after a 0.2 percent gain in August, according to the monthly report from the Commerce Department. Prices, the government notes, also remain in check.

Because consumers spent less, they saved more. The savings rate rose to 3.3 percent last month from 2.8 percent.

Christmas cheer?

Fears about the recession are slowly subsiding, with more than half of those surveyed (54 percent) saying they expect the economy will improve in 2010, compared with 28 percent responding favorably last year.

The optimism is also starting to show in Americans' shopping plans. More than half of consumers (51 percent) hope to spend more or the same on the holidays, compared with last year's 41 percent response.

Despite expectations for economic improvement, consumers continue to reduce their spending on gifts. The average number of gifts people plan to purchase declined to 18.2 from 21.5 last year and 23.1 in 2007. The amount consumers plan to spend on gifts is down as well, to $452 compared with $532 in 2008, and $569 in 2007.

Consumers, however, do appear willing to increase their spending on the non-gift items that traditionally account for a smaller portion of the holiday budget. These categories include socializing away from home, entertaining, non-gift clothing and home/holiday furnishings. These increases lift consumers' total anticipated holiday spend to $1,145 -- a 16 percent increase over last year.

Caution still reigns when it comes to purchasing behavior, as two-thirds (66 percent) of consumers plan to shop differently due to concerns about the economy. These shoppers demonstrated a focus on frugality in their intentions to buy items on sale (74 percent), buy lower-priced items (57 percent) and use more store coupons (54 percent).

Among consumers planning to spend less, worries over job loss and pay reduction rose sharply, doubling to 35 percent this year (from 17 percent in 2008). Concerns about higher food and energy prices, stock market volatility, and an overall concern about the economy have shifted downward, averaging a 21 percentage point drop from 2008.

"Consumers appear to be revisiting shopping categories that they had put on the back burner for a while, and they may be returning because of the need to replenish," said Stacy Janiak vice chairman and Deloitte's U.S. Retail leader. "Over the past several months, we have seen key economic indicators ease from their worst levels, helping to put more resources back into Americans' pockets. As a result, a cautious upturn in sentiment may draw consumers out of their bunkers, turn their focus away from saving and debt reduction, and encourage them to do some holiday shopping for their homes, family and friends."

Discount stores and gift cards remain top choices

Discount stores continue to hold the top spot as a shopping destination with nearly six out of ten people (59 percent) saying they expect to shop at discount/value department stores. Online shopping remains strong at 42 percent, and the combined electronics, office supply and computer store category ranks third at 26 percent. Traditional department stores continue their downward trend, falling to 23 percent, from last year's 35 percent. Some of the more popular shopping destinations include toy stores, outlet stores/centers and off-price stores.

Gift cards hold their first-place position for the sixth year in a row, with 64 percent of consumers planning to buy them as presents. While the number of gift cards they plan to purchase remains nearly flat (5.4 versus 5.3 last year), consumers' planned spending per card rose to $35 from $28 last year and nearly back to the pre-recession average of $36 in 2007.

Technology-related gifts -- including game consoles, computer and video games, home, personal and automotive electronics -- continued to grow in popularity. Computer and video games lead the pack with 26 percent of consumers planning to purchase these items, followed by game consoles at 13 percent and home electronics up to 12 percent (from 9 percent in 2008).

Deal-seekers may turn up empty-handed

Consumers are expecting a repeat of last holiday season -- deep discounts and plenty to choose from. For example, 38 percent of those buying electronics and toys expect a discount of 50 percent or more and half of those planning to purchase apparel (47 percent) and jewelry (50 percent) anticipate a discount of 50 percent or more.

"Consumers who hold out for deep discounts may not find the sale -- or the product - in the store this season," said Janiak. "Retailers have maintained leaner inventories all year given the decreased level of spending. In this environment, retailers should consider engaging sales-seeking consumers at a different level by creating exciting in-store shopping experiences, reaching out to shoppers through social media or mobile technologies, or offering limited-time e-mail promotions."

Mobile phones act as new shopping guides

The popularity and ubiquity of mobile phones may be a bright side for retailers this year with one in five (19 percent) of consumers indicating they plan to use their mobile phone while shopping to find store locations, obtain coupons and sales information, and research products and prices. In the 18 to 29 years old age group, four out of ten say they plan to use their mobile phone for holiday shopping.

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