2005: The Year Consumers Spend Less

Jan 03, 2005

By George Anderson

Higher prices for goods, rising interest rates and personal debt are going to cause consumers to rein in their spending in 2005, according to Standard & Poor’s. Even so, says S&P, consumers will wind up spending 3.8 percent more at retail (excluding cars and food) than in 2004.

According to a report in Business Week, the rise in interest rates is already having an effect on consumer finances. U.S. households were spending 13.32 percent of their disposable income to service debt at the end of the third quarter in 2004, a near record level. Further increases by the Federal Reserve from the current 2.25 percent rate will only add to that debt.

Higher energy prices had an impact on the economy in 2004 with lower income earnings especially hard hit. Stores that cater to lower income Americans reported modest sales growth during the recently completed holiday season.

Luxury goods retailers were largely immune to the various drags on household spending with many reporting sizeable increases in 2004. This year is likely to be less positive as many middle-income consumers who traded up last year become more frugal with their dollars in 2005.

Online retailers can expect to see sales gains again in 2005, although perhaps not as large a percentage increase as in recent years. Online sales of goods (excluding travel services and autos) were up 25 percent in 2004, according to JupiterResearch. The firm expects online sales to grow by 19 percent this year.

Patti Freeman Evans of JupiterResearch said part of the slower rate of growth will be due to the fact that a larger number of shoppers are already shopping online, so there will be fewer converts from brick and mortar locations. Internet retailers, said Ms. Freeman Evans, are finding that achieving growth means having to capture a greater share of sales from consumers who are already shopping online.

Moderator’s Comment: What economic and other factors do you believe will affect retail sales in 2005? Are there retailers
you expect to do well, or not, in this environment?

George Anderson – Moderator

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