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Strong Housing Market to Drive Consumer Spending This Summer
NEW YORK -- Despite rising interest rates, surging home values will fuel consumer spending, triggering a chain reaction that leads to purchases of furniture, consumer electronics and home improvements, according to Deloitte Research's Leading Index of Consumer Spending. Substantial tax refunds and a leap in payroll employment provide the cash needed for down payments on new homes."Many consumers postponed buying new homes until interest rates reached the bottom. With interest rates on the rise, they have decided to get off the dime to avoid higher rates," says Carl Steidtmann, Deloitte Research's chief economist and author of the monthly index. "Baby boomers are purchasing their second homes in retirement and vacation spots, while children of baby boomers are purchasing their first homes at the low-end, creating a chain reaction. Essentially, consumers are trading their current residences for a better home."Adds Steidtmann, "Consumers are in a strong position to continue spending. Retailers should plan for strong demand, particularly in housing-related products and consumer electronics."Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:Initial unemployment claims are down 20% from a year ago. The reduction in claims adds to the strength of the index and indicates steady improvement in the job market.Payroll employment rose by more than 513,000 in the first quarter of 2004, posting the largest quarterly gain increase since the first quarter of 2000. Momentum in payroll employment will continue throughout the year.Compared to previous years, a more complex tax code and higher number of households subject to the Alternative Minimum Tax has led to late filings and delayed tax refunds. The delay will result in continued tax refund spending in May and June.Larger tax refunds in early 2004 has fueled the upward momentum of the index, but is not expected to continue beyond June.After modest growth in 2003, real wage gains have flattened in recent months. Barriers to real wage gains include accelerating inflation and rising benefits costs.Real home prices fell slightly in March, but remain significantly higher than the previous year. Home mortgage refinancing has created a larger pool of future cash for use in construction, remodeling and other housing-related expenses.The index, comprising four components -- tax burden, initial unemployment claims, real wages and real home prices -- rose to an all time high of 5.46% in March, up from an upwardly revised gain of 5.11% the previous month."We have reached an inflection point in the economy," says Steidtmann. "While in the past, growth was fueled by low interest rates and tax cuts, we are now seeing growth stem from rising housing values and job creation."Deloitte, a professional services firms, provides audit, tax, financial advisory services and consulting through nearly 30,000 employees in more than 80 U.S. cities."