Even with small gains in three out of four components, the Deloitte Consumer Spending Index fell slightly in December because of a decline in housing prices.
The Index is made up of four parts - initial unemployment claims, real wages, real home prices and tax burden. It fell to 1.86 from 1.93 in November. The Index tracks consumer cash flow as an indicator of future consumer spending.
"Initial unemployment claims continued to decline in December, while real wages benefited from a decrease in energy prices," says Carl Steidtmann, Deloitte's chief economist. "This positive movement was not substantial enough to offset the continued pressure from the housing market, which has been the most significant drag on the Index for many months."
Highlights of the Index include:
Tax Burden: The tax burden rose slightly to 11.09% as state and local governments increased taxes to cover budgetary shortfalls.
Initial Unemployment Claims: Claims moved lower in the most recent month to 396,250, falling below the 400,000 mark for the first time in seven months.
Real Wages: While down 2.1% from a year ago, real wages posted a small gain to $8.75 on falling energy prices.
Real Home Prices: Prices fell 5.72% from a year ago. Real home prices are now down to levels not seen since the middle of 2000.
Consumer Spending in 2011
A few factors boosted consumer spending in 2011, according to Deloitte's analysis of U.S. Commerce Department data:
Gasoline prices have fallen roughly 60 cents a gallon, since peaking in May which adds $80 billion to household purchasing power.
A sharp drop in the savings rate from 5% to 3.5% has added $150 billion to consumer purchases.
The 2% cut in Social Security tax withholding last January added another $90 billion.
Together these developments represent a gain of $320 billion, yet real consumer spending during that period increased just half that amount, by $160 billion.
Also, real disposable incomes have declined on a year-over-year basis for the past four months. Job growth has been in lower-income industries, while the job loss has been in higher-income industries like government and financial services, adding to the weakness in household earnings.
Outlook for 2012
The ability for consumers to continue to spend at the rates seen in 2011 may be in question.
"Going forward, it is unlikely there will be another tax cut, and Social Security tax withholding may rise back to its previous level by March," said Steidtmann. "Another 150 basis point drop in savings is not likely, and while gas prices can always fall, the rising tensions in the Middle East would argue against such a drop."
Steidtmann contends that without income growth, spending will contract in a way that outpaces the decline in incomes.