• by Lynn Russo Whylly , June 23, 2008

The consumers come down

You can't listen to or read a news article today without the headlines turning to the subject of consumer confidence. An ABC News/Washington Post poll put the drop at 5 points in early May. Unity Marketing's (UM) Luxury Consumption Index (LCI) dropped 9.1 points at the end of this year's first quarter, after a 23.8 point drop at the end of 2007. The Conference Board's (TCB) Consumer Confidence Index, which had already declined sharply in March, fell another 3.6 points in April to 62.3. In addition, TCB's CEO Confidence and Help Wanted indices are also down. And to cap it all off, Yankelovich reports that consumer anxiety has doubled in less than four months. You might think it's the $4-a-gallon gas crisis that's got everybody in a tizzy, but that's just one of many worries. "This recent reduction in consumer confidence is a result of weakening business conditions which, in turn, have led to an employment decline," explains Lynn Franco, director of TCB's Consumer Research Center.

TCB's Consumer Confidence Index consists of two sub-indices: the Present Situation Index, which is how people are feeling about the current economic climate, and the Expectations Index, which is how they feel about the future. In TCB's April 29 analysis, the Present Situation Index decreased nearly 10 points to 80.7, down from 90.6, while the Expectations Index remained flat (50.1 vs. 49.4 in March), which could mean that people see a light at the end of the tunnel.

Unity Marketing's Luxury Consumer Confidence Index - which tracks spending on home, personal, auto and experience goods (such as travel and dining) has plummeted by half in two years (from a baseline of 100 in January 2004 to its current 53).

Jobs, wages, inflationary pressures, food and gas prices, and the credit crisis are all playing a role, Franco says, noting that natural disasters do have an effect on people's expectations, but they tend to be short-lived - roughly two to four months - and the further away from home they happen, the lower the shock. Marketing messages that speak to the current situation and offer some sort of relief - for example, zero percent financing - will get the most attention, Franco feels.

"Saving money is key," says Pam Danziger, president of Unity Marketing. "To think that affluent consumers aren't looking for bargains and are looking for the highest prices is crazy. They are powerfully motivated by sales." She adds, "It's all about value. They will spend the money if they perceive the value is there."

"Perhaps the worst is over," says Unity Marketing's economic forecaster Thomas Bodenberg. "The rate of decline in luxury consumer confidence from fourth quarter '07 to first quarter '08 was substantially less than that from third to fourth quarter '07. This may mean that the lack of confidence has now fully diffused and that luxury consumers' confidence has reached a floor."

The numbers don't support this theory, however. Unity Marketing found that some 41 percent of luxury consumers expect to spend less on luxury purchases in the next 12 months, compared with only 13 percent who expect to spend more. Meanwhile, the percentage of TCB respondents intending to take a vacation over the next six months has fallen to a 30-year low. Looking ahead, TCB says, consumers' outlook for the economy, the job market and their income prospects remain pessimistic.