There are few economic forces more powerful than the American consumer. After all, two-thirds of the U.S. economy is based on household spending and, despite higher taxes and lower take-home pay, the consumer is alive and well.
Consider the spending activities this month centered around two popular events. The National Retail Federation says consumers are expected to spend $17.2 billion this month on apparel, food and decorations for Easter, up from $16 billion last year.
And just a week ago, partiers spent $4.7 billion to celebrate St. Patrick’s Day, which is the kind of spending that could certainly be described as discretionary.
March Madness spending reflects a continuation of consumer activity in February. The NRF reported retail sales last month were up 0.7 percent compared to January.
“Our consumer research consistently shows a cautious shopper that is making tough spending decisions based upon economic uncertainties, lower paychecks and higher prices for things such as gas," said Matthew Shay, president of the retailer organization. "While retail sales numbers indicate good momentum for the economy, with less earning power may continue to face ongoing pressure.”
Coming into 2013, many analysts had feared consumers would back off on spending because of the uncertainty of the fiscal cliff and smaller paychecks, the result of the increase in Social Security taxes. And the hulking threat of sequestration — automatic cuts in federal government spending — would certainly sap not only spending but also consumer confidence.
However, that appears not to be the case. The Conference Board recently reported its Consumer Confidence Index rose in February despite the fiscal fears.
“Consumers are cautiously optimistic about the outlook for business and labor market conditions. Income expectations, which had turned negative in January, have improved modestly,” said Lynn Franco of the Conference Board.
Of course, there’s nothing like a rebound in stocks and housing to improve the mood of households. With the Dow Jones Industrial Average setting new record highs for eight consecutive sessions in the first half of March, and home prices marching steadily higher, it has given a boost of confidence to consumers.
“The economic fundamentals that influence consumer spending are aligning," said Patricia Buckley of Deloitte. "Financial institutions and the markets are stronger, and consumer confidence and real spending appear to be weathering the 2013 payroll tax increases fairly well. Absent the uncertainty surrounding the impact of the sequester, an economic turnaround would likely be imminent.”
The Deloitte Consumer Spending Index held steady in February as a result of a drop in initial claims for jobless benefits and a rise in real average hourly earnings.
At the same time consumers seem ready, willing and able to continue spending, they are also being responsible with their personal finances.
The S&P/Experian Consumer Credit Default Indices, issued last week, showed a decrease in default rates in February to 1.55 percent, down from 1.63 percent a month earlier. A year ago the default rate was 2.09 percent.
“These trends are consistent with other economic news," said S&P’s David Blitzer. "Additionally, foreclosure activity continues to decline even though it remains at elevated levels compared to the period before the financial crisis.”
Not all observers, however, share the enthusiasm about consumer spending. Scott Brown, economist with Raymond James, says it’s a tale of two consumers.
“One often talks about ‘the consumer,’ but there’s no such thing," said Brown. "As a rule of thumb, the top 20 percent of income earners account for about half of personal income and consumer spending. Spending for the top 20 percent of households shouldn’t be affected by the payroll tax increase, delayed tax refunds, or higher gasoline prices.
"For the other 80 percent, the payroll tax increase and higher gasoline prices matter a lot."
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