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Have-Nots Hurting, Impact Confidence Index

June 27, 2011 by · Leave a Comment 

Whether the economic recovery in the U.S. can continue could depend on a single factor: consumer confidence.

As reported by USA Today, confidence is important because consumers who are upbeat about prospects tend to spend more, driving corporate profits and job growth. Companies hire more employees, boosting spending, growth and confidence.

Such self-reinforcing loops are the stuff that recoveries are made of, and one reason the current rebound has been so tepid. While the economy has bounced back from a devastating recession, the gains have largely helped better-off households, economic data show. That has left out a huge swath of consumers.

The disparity will play a decisive role in reports on how consumers view the economy. Tuesday, the Conference Board will release its widely followed consumer confidence report for June. In May, it dropped to 60.8 from 66 in April. Since the economy has shown little sign of improvement, it’s likely to indicate further concern. “We have a backlog of Americans who’ve been out of work for two years,” says Ed Farrell, director of Consumer Reports National Research Center. “It’s going to take a strong surge in the economy to pull these people back in.”

According to a monthly survey released last week by Consumer Reports, households that earn less than $50,000 have been extremely downbeat on the economy every month since the survey’s April 2008 launch. Such households make up half of the U.S. population. Meantime, affluent households — those that pull down $100,000 or more a year — have been feeling on average positive about the economy since February 2010.

The primary factor behind the disparity: jobs. Affluent households have seen little impact on job prospects overall. Meanwhile, low-income households have seen a net decline in jobs for 23 out of the past 24 months, according to the survey.

To be sure, the strength in upper-income households has been an important element in getting the economy back on its feet. While just 18% of households earn more than $100,000 a year, they account for slightly more than one-third of all household spending, according to a recent survey by the Bureau of Labor Statistics.

There are other factors behind the improved outlook among upper-income families besides jobs. For one, they tend to own stocks. The market has undergone a substantial rally since early 2008, adding to the so-called “wealth effect.” While the market has taken a hit in recent weeks, it remains well above where it stood two years ago.

The rally has been little comfort to low-income households, which hold few stocks. Instead, high oil prices have dragged on the discretionary income of less well-to-do families.

The performance of high-end retailers vs. discounters highlights the disparity. Upscale retailers such as Nordstrom and Saks have recently posted strong results. Tiffany & Co. reported a 25% jump in its first-quarter net income. The high-end jewelry retailer said even though it had to mark up prices due to higher gold and silver costs, demand hasn’t slackened. Wal-Mart Stores, meanwhile, which caters to cash-strapped families, reported weak first-quarter sales. Others, such as Old Navy and Aeropostale have also been struggling, says David Berman, a hedge fund manager who closely tracks retailers. The recovery “has been a tale of haves and have-nots,” Berman says.

While luxury-goods retailers have seen no slackening from higher costs, the same can’t be said for mid-range retailers and discounters. A surge in materials prices such as cotton has made it more costly for many retailers to produce finished goods. In turn, they’re raising prices.

La-Z-Boy recently boosted its prices to offset higher costs. The company has said demand has already slackened due to high prices at the pump. More expensive recliners could also crimp sales.

One positive sign of late for less-wealthy families has been a drop in oil prices. The turmoil in the Middle East, which triggered a pop in prices earlier this year, has cooled off recently, though hot spots such as Libya remain a concern. Last Thursday, crude prices plunged after the International Energy Agency said its members would release 60 million barrels of crude oil from emergency stocks.

Lower oil prices can provide a meaningful pop to lower-income families. Among households that make $70,000 or less, 5% of their expenditures go toward gasoline and motor oil, while households in the higher-income bracket allocate 3% of their outlays toward fuel.

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