Continued weakness in the index poses a challenging sales environment for retailers as they move into the all important holiday season
Carl Steidtmann, chief economist of Deloitte Research

The damaging effects of Hurricane Katrina and Hurricane Rita, rising heating oil prices, and escalating housing costs present challenges for the 2005 holiday retail season, according to Deloitte Research's Leading Index of Consumer Spending and "Outlook for the Holidays" report. High inventories and moderated consumer demand will drive retailers to pursue more substantial promotional strategies.

"Consumers have done a heroic job in holding up their end of the economy over the past eight months, with real consumer spending rising by four percent, despite real wages declines, falling savings rates, slow employment growth, and a rising tax burden," says Carl Steidtmann, chief economist of Deloitte Research and author of the monthly index. "Continued weakness in the index poses a challenging sales environment for retailers as they move into the all important holiday season."

Although retailers face several hurdles this holiday season, their strategies may be adjusted to reflect the coming retail environment and consumer purchasing power.

"As we face an increasingly challenging holiday season, retailers can reduce their exposure to negative consumer spending factors by reexamining inventory commitment, focusing on in-store promotional plans, and offering creative purchasing options such as gift cards or associated value added services," says Pat Conroy, vice chairman and national managing principal of Deloitte's Consumer Business practice. "Retailers must also put special emphasis on maximizing their conversion rate. It will be critical for retailers to carefully manage their talent and align their seasonal hiring plans and training to ensure a high level of customer service."

Deloitte's Consumer Business practice plans to release the results from its 20th Anniversary Holiday Survey on November 1, 2005.

Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:

* General Merchandise, Apparel and Furniture (GAFO) sales growth is
expected to slip to 4 to 4.5 percent for the holiday season.

* Personal income tax levels continue to rise slowly, with federal tax
revenues for the first eleven months of the fiscal year up 13.7 percent,
accounting for a $100 billion reduction of deficit estimates for 2005.
Disaster relief spending will temporarily limit this effect.

* Initial unemployment claims have increased in the wake of Hurricanes
Katrina and Rita, but the trend will reverse as the rebuilding efforts
begin. Additionally, the loss of employment will temporarily depress
household cash flow.

* Real hourly wages continue to decline due to rising energy and benefits
costs, with the short-term deterioration in the labor market acting as a
barrier to future real wage growth.

* Continued high-energy prices will negatively affect consumer spending,
particularly for lower income households.

* Real home prices continued to slide and are down from a year ago. The
weakness in home prices is the biggest single factor in the slowdown in
the Deloitte Index.

The index, comprising four components -- tax burden, initial unemployment claims, real wages and real home prices - fell in September to 3.38 percent, from a downwardly revised gain of 3.75 percent in August.