Consumer Conundrum: Solid Confidence Gains Collide with Cautious Spending

Since the start of the New Year, a curious situation has been baffling retailers. After hitting pre-recession levels in January, consumer confidence wavered between February and April, but maintained a healthy 95.2on the Conference Board Index last month, well above its 2014 mark. So far, however, this cheerier consumer sentiment has hardly translated into more robust sales.

In fact, U.S. retail sales declined for three consecutive months—December through February—before finally rising by a mere 0.9 percent in March, to a seasonally adjusted $441.4 billion, according to the Commerce Department. While we anxiously wait for April’s results in the midst of what are typically the slower spring months, retailers are left with a conundrum that defies their most trusted consumer spending models. Confident yet cautious, consumers remain comfortably in hibernation. 

On the other hand, a host of positive indicators and projections point to a probable thaw in discretionary spending. For one, the job market, by nearly all accounts, has been stellar over the past 12 months, recently achieving its strongest 12-month stretch of job creation since 1995. Despite a tempered March jobs report, economists are optimistic that April’s non-farm payroll numbers will rebound back to over 200,000, which could help push the current unemployment rate of 5.5 percent to 5.4 percent, and potentially provide a much-needed boost to consumer spending.

Still, a number of factors could further inhibit an easing of consumers’ purse strings in the months ahead. Front and center are consumer concerns around gas prices. Though they declined steadily to rock bottom levels from last fall and through to spring, tepid spending indicated that consumers weren’t necessarily shopping with their pump savings. Rather, they looked to invest in savings, as well as pay down debt. With some analysts forecasting an imminent rise in gas prices by early summer, consumers will remain sensitive to increases.

Similarly, retailers and consumers alike are fixated on the Federal Reserve. With unemployment holding steady below six percent, many are calling for the Fed to curb its easy-money policy and normalize what have been historically low interest rates, which could notably affect consumer spending levels.

The National Retail Federation projected 4.1 percent sales growth for 2014, whereas the retail CFOs that we surveyed in our 2015 Retail Compass Survey of CFOs came in close with a 3.9 percent forecast. Looking across the industry and the economy more broadly, upward-trending indicators provide positive support for these projections. While consumers may remain fickle despite their apparent confidence, retailers will be looking to take full advantage of these optimistic signals and warmer weather as they round the corner to the back-to-school season.

Stay tuned to the Consumer Business Compass blog until next week, when we’ll be discussing results from BDO’s 2015 Retail RiskFactor Report, including retailers’ perceived risks around confidence levels and consumer trends.