Consumer Confidence is on the Mend

As we near the halfway mark for Q2 2013, it appears that the retail industry is continuing its modest, yet steady, recovery. Continuing the trend of the first quarter, retail sales have been slowly inching upward, though certainly not at the rate that retailers would like to see. Most recently, retailers reported 5 percent growth in their April same-store sales (excluding drug store purchases), and overall retail sales grew by about 0.1 percent in April. While neither of these numbers are stellar, they do suggest that the retail industry is continuing to stabilize alongside the U.S. economy as a whole.

Consumer confidence, another key economic health indicator, is following along this path. Over the past several months, consumer confidence has experienced highs and lows, reaching a nearly five-year high in November 2012 before plummeting to a 14-month low in January 2013. However, since February, confidence has been stabilizing and carefully inching upward as other sectors of the economy experience their own recovery. March 2013 consumer confidence increased to 61.9, according to the Conference Board, and April’s index rose to 68.1—the highest level since November 2012.

Several factors underlie this upward trajectory. First, consumer spending is beginning to level out as shoppers feel more removed from the political wrangling over the fiscal cliff. Though much of the country’s fiscal situation remains unresolved, and many lawmakers are pushing for austerity measures, consumers’ most immediate concerns about income tax hikes are fading. Consumers have even adjusted to the new normal of higher payroll taxes as a result of January’s fiscal cliff debates. While the end of the tax holiday and tax increases for high-income consumers were credited with lower retail sales in Q1, the concern is no longer quite as pressing as it once was.

Second, unemployment is slowly improving. The unemployment rate hit a 4-year low of 7.5 percent in April, and the economy added an estimated 165,000 jobs. March’s numbers, initially reported as a dismal 88,000 jobs added, have been upwardly revised to 138,000 jobs added. Nevertheless, unemployment may continue to dampen consumer confidence to some extent, with many new jobs entailing only part-time hours while some workers drop out of the labor force altogether.

Consumers are also feeling better about the housing market and energy costs as we head into the summer. Housing prices are on the rise as consumers take advantage of low interest rates, while gasoline prices have also fallen, freeing up some discretionary income for shoppers.

Overall, retailers have reason to feel cautiously optimistic about consumer confidence over the next several months.  Now, we will see how that confidence translates into purchases over the busy summer and back-to-school seasons.

What are your expectations for consumer confidence in the coming quarter?