2011

Overview of nancial and socioeconomic factors driving consumer attitudes and spending behavior.

Consumer

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Consumer

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Consumers & The Economy

The National Bureau of Economic Research labeled the ofcial end of the recession as 06/09, though the effects of the downturn are still being felt at the consumer level, particularly due to continued weakness in the job market. Several consumer-related metrics markedly improved over 2009, however, without jobs consumer sentiment and condence remained low. Consumer sentiment scored in the low to mid 70s for most of 2010, taking a slight downturn in 3Q10 to the upper 60s. It recovered again in early 2011, reaching 77.5 in 02/11. Consumer condence, however, was a little more erratic, beginning the year by falling from 56.5 in 01/10 to 46.4 in 02/10 then sharply rising to 62.7 by 05/10. Consumer condence has been steadily growing since 09/10, starting 2011 at 64.8 and increasing to 70.4 in 02/11. The expectations component is driving the improvement in the indices with consumers being more positive about the future than the current situation. Unemployment Rate vs Consumer Sentiment & Consumer Condence
160 140 120 100 Consumer sentiment/confidence 80 60 40 20 0 2%
Consumer sentiment Consumer confidence Unemployment

12%

10%

8%

6%

4%

0% 2004 2006 2008 2010

2000

2002

Source: BLS, The Conference Board, Reuters/University of Michigan Surveys of Consumers

U.S. Population
In spite of recent improvements, consumers' attitude remained pessimistic throughout 2009-10. This is evident in the low population growth due to lower immigration, lower birth rates and the lack of mobility in the workforce. U.S. population numbered 308.7MM in 2010, a 9.7% increase over the 2000 Census, the lowest 10-year growth rate since the Great Depression The birth rate in 2009 was the lowest in 100 years, falling 2.7% to 13.5 births per 1,000 people Interstate migration from 03/09-03/10 was 1.4%, lower than any year since records began in 1948 GE Capital

Unemployment rate

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Consumers & The Economy continued

Consumers are climbing out of a recession, but are leaving behind a generational gap not in attitude, but in earning potential. The rst Baby Boomers (born 1946-64) turn 65 in 2011, with 10,000 per day reaching that age over the next 19 years. The economic downturn caused many Boomers to delay retirement, which in turn created a trickle-down effect to younger employees. Generation X (born 1965-79) may experience a more difcult time receiving promotions or salary increases the longer Boomers stay in their jobs, and Generation Y (born 1980-91) is dealing with high unemployment and lower entry-level salaries, which may curtail lifetime earnings.

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Unemployment
The national unemployment rate ended 2010 at 9.4% in December, the 20th consecutive month above 9%, exceeding the 1980s recession streak of 18 months. The positive, however, is the rate of change in unemployment, which turned negative in 08/10, and has remained so since (02/11). Job growth remained sluggish in 2010, with the private sector adding 1.2MM jobs, only 13% of the 8.8MM jobs the private sector shed during the recession. Unlike other economic recoveries, this one is not led by employment growth. Instead, manufacturing and steadily increasing consumer spending are leading the recovery. Unemployment Rate vs YoY Change
10% 8% 6% 4% Unemployment rate 2% 0% 2008 -2% 2009 2010 -0.8%
U.S. unemployment rate YoY change

4.0% 3.2% 2.4% 1.6% 0.8% 0.0% YoY change

Source: BLS

Of the ~13.9MM unemployed individuals in 01/11, 44.8% had been unemployed for >6 months College graduates represent 30% of the nation's labor force; in 11/10, the unemployment rate of this population was 5.1%, the highest level since 1970 when records began 70% of adults had a family member or close friend who lost a job over the past two years The labor force participation rate of adults over age 65 was 17.4% in 2010, vs. 12.9% in 2000 Each month in 2010, an average of 14.8MM people were unemployed Industries that gained >125,000 jobs (seasonally adjusted (SADJ)) in 2010 were: professional & business services (+420,000); education & health services (+408,000); trade, transportation & utilities (+185,000); and leisure & hospitality, including restaurants (+142,000) The restaurant industry (i.e., restaurants and bars) added 115,500 jobs (SADJ) in 2010, though not enough to replace the 366,000 jobs eliminated in 2008-09

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Unemployment continued
Percentage of Unemployed Who Have Been Unemployed >6 Months
50%

40%

30%

20%

10%

0% Jan-83
Source: BLS

Jan-87

Jan-91

Jan-95

Jan-99

Jan-03

Jan-07

Jan-11

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Household Finances
Disposable personal income (DPI) rose 3.1% nominally (1.4% adjusted) in 2010, while the personal savings rate (5.8%) ended the year at the same level as in 1993. Personal savings started the decade at 2.9% and eventually fell to 1.4% in 2005, the lowest level since 1934. Higher personal savings is a paradox because, while good for consumers' personal nances, it indicates consumers are spending less of their disposable income, which could ultimately become an economic headwind, especially for entertainment, retail, services, dining and leisure. Spending increased more than DPI for nine months in 2010, six of which were in the second half. This reversed in 01/11 when the personal savings rate rose to 5.8%. DPI vs Personal Savings Rate
$12,000 $10,000 $8,000 $6,000 $4,000 Billions $2,000 $0 1990
Nominal DPI Savings rate

8% 7% 6% 5% 4% 3% 2% 1% % of DPI

1994

1998

2002

2006

0% 2010

Source: BEA

Real PCE1
8% 6% 4% 2% 0% 2000 -2% YoY change -4% -6% -8% 2002 2004 2006 2008 2010
Restaurants Grocery stores

Millions of chained (2005) dollars, SADJ at annual rates Source: BEA

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Household Finances continued

Consumer spending rose 3.5% (1.8% adjusted) in 2010 after two consecutive years of real declines. Prior to the 0.3% drop in 2008, real consumer spending had not decreased on an annual basis since 1980. Consumers lowered spending (in real terms) in nearly every major product category in 2008-09. Among the categories experiencing the strongest increases (i.e., >5%) in 2010 were recreational goods and vehicles (+12.1%), furnishings and durable household equipment (+8.6%), and clothing and footwear (+5.6%). In 4Q10, spending on durable goods (long-lasting items like cars and appliances) rose at a annual rate of 21.0%, the largest gain since 4Q01. Despite the recent gains, spending behavior remains cautious. Rather than broadbased increases in spending, consumers are favoring particular categories (e.g., entertainment, dining or leisure). Though 2010 data is not yet available, the change in food expenditures by age group from 2005 to 2009 shows a dramatic shift in away-from-home spending, particularly for those 34 years old. In 2005, consumers <25 years old spent 51.2% of total food expenditures away from home, vs. 41.4% in 2009. For 25-34 year olds, 47.8% of food dollars were spent away from home in 2005, vs. 43.6% in 2009. Average Annual Food Expenditures by Age Group
75+ 65-74 55-64 45-54 35-44 25-34 <25
$4,180 $3,932 $6,169 $5,639 $3,388 $4,189 $5,561 $6,304 $6,202 $7,445 $6,980 $7,760 $7,359 2005 2009 $4,900

Food Away from Home Expenditures by Age Group

75+ 65-74 55-64 45-54 35-44 25-34 <25
Source: BLS
31.9% 34.4% 35.9% 39.4% 41.7% 43.8% 41.7% 45.5% 42.7% 44.0% 43.6% 47.8% 41.4% 51.2%

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Household Finances continued

Household net worth began to recover the $16.8T lost in 3Q07-1Q09. It gained $6T in 2Q093Q10 and ended 3Q10 at $54.9T, but was still well below the $65.7T high in 2Q07. During 2Q10, net worth declined due to a fall in the value of nancial assets; stocks declined $854B, mutual funds fell $306B and pension funds fell $746B. As households pay down debt and the stock market continues to improve, net worth should continue on an upward trajectory. Housing however will continue to be a limitation because about 30% of household net worth was tied to home values as of 3Q10, vs. 35% in 2006. Though home prices in certain markets are stabilizing, it will likely be several years before consumers recover wealth in this sector. Change in Household Net Worth
$4 $3 $2 $1 $0 -$1 -$2 -$3 -$4 Trillions -$5 -$6 2000 2002 2004 2006 2008 2010
$16.8T

Source: The Federal Reserve Board

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Housing
The housing market remained under pressure in 2010. Though seemingly at a bottom, a recovery in housing is expected over the long-term, rather than immediately. Sales of new and existing homes continued to fall in 2010 in spite of historically low mortgage rates, leading to higher inventories, which will likely keep prices low for several more years. In some of the hardest-hit markets, homebuyers are even paying cash. Foreclosures, an additional strain on home values, reached historic highs in 2010 and may have actually been worse had several banks not temporarily halted foreclosure proceedings late in the year due to fraud allegations. Housing Starts1
3,000

2,500

2,000

1,500

1,000 Thousands

500

0 1970s 1980s 1990s 2000s

New privately-owned housing units started, SADJ annual rate Source: U.S. Census Bureau

The homeownership rate fell to 66.5% in 4Q10 from 67.2% in 4Q09, vs. the record high of 69.2% in 2004 28% of home sales were all-cash deals in 2010, vs. 14% in 10/08 and 32% in 01/11 322,000 new homes were sold in 2010, a 14.1% year-over-year (YoY) drop and the worst year since records began in 1963 Existing home sales totaled ~4.9MM in 2010, a 4.8% decrease over 2009 and the lowest year since 1997 Nearly 2.9MM properties received a foreclosure notice in 2010, a 2% rise from 2009 and a 23% rise over 2008 Five states (i.e., AZ, CA, FL, IL and MI) accounted for 51% of national foreclosure activity, or ~1.5MM properties received a foreclosure ling GE Capital

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Housing continued
Median Home Price1
$250
Median home price 5-yr moving average

$200

$150

$100

Thousands

$50

$0 1980s 1990s 2000s

1 National median price for an existing, single-family home Source: National Association of Realtors

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Debt
The recession provided a wake up call for many consumers who had used debt as a way to sustain a particular lifestyle, often living beyond their means. In addition to a general pullback in spending once the recession deepened, households worked to pay off debt, particularly credit card balances. Total consumer debt (monthly) has declined for only 39 months since 1990, 60% of which (23 months) has occurred since 08/08. Revolving, or credit card debt, has been on a steep decline as households rein in spending, using debit cards or cash to manage expenses better. Revolving debt reached a high of $973.6B in 08/08 and declined 27 consecutive months before rising again in 12/10, ending 2010 at $826.6B. Nonrevolving debt, which includes auto loans, rose in 2H10 due to stronger auto sales. Consumer Credit 20% 15% 10% 5% SADJ change (annual) 0% 2002 -5% -10% -15% -20% 2004 2006 2008 2010
Revolving credit Nonrevolving credit

Source: The Federal Reserve Board

Credit card solicitations by mail reached 2.73B in 2010, vs. 1.39B in 2009 Credit card offers mailed since 2Q09 carried variable rates; the gap between the prime rate and the average APR was 10.81 percentage points at YE10, the widest in ~20 years The national credit card delinquency rate (>90 days past due) fell to 0.83% in 3Q10, a 9.8% drop over 2Q10 and a 24.6% drop YoY Credit card delinquency is forecasted to decline 10.67% in 2011 to 0.67% from a projected YE10 rate of 0.75%; this expected drop in 2011 would be a 50.7% decrease from 4Q07, the start of the recession
Source: BEA, Brookings Institution, Bureau of Labor Statistics (BLS), The Conference Board, The Federal Reserve Board, National Association of Realtors (NAR), National Bureau of Economic Research, National Center for Health Statistics, NRA, Pew Research Center, RealtyTrac, Reuters/University of Michigan Surveys of Consumers, Synovate, TransUnion, USA Today, U.S. Census Bureau, WSJ

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