After lagging for much of the spring selling season, including a relatively slow Mother’s Day period, jewelry demand in the U.S. market showed a welcome improvement during July.

 

• Specialty jewelers posted a gain of 5.8 percent in sales during the month of July. This was the second strongest month of the year.

• Total jewelry sales at all retailers – specialty jewelers, discounters, mass market merchants, and others – rose by a solid 5.5 percent in July. Again, this was the second strongest month of 2007.

Based on recently revised numbers from the U.S. Department of Commerce, jewelry sales in the first half of 2007 were stronger than preliminary reports. It appears that total jewelry sales in the U.S. were up by about 4.8 percent for the six months ended June 2007.

 

Previously reported preliminary numbers suggested that this increase was a more moderate 3.9 percent gain. Specialty jewelers’ sales were also up by about the same amount, for both the six months ended June and the fiscal six-month period ended July.

 

However, it is important to note that these numbers are simply averages. Individual jewelers are reporting a wide disparity in their sales results, both on a monthly basis and for the year-to-date. Essentially, here are the underlying trends:

• Guild jewelers posted robust sales gains.
• Mass market jewelers are struggling to stay even with last year.

There are many reasons for this industry sales disparity. Far too many middle market consumers, who shop at middle market jewelers, are stretched financially. They bought the largest house they could afford and took out the biggest mortgage possible; that house is likely to be worth less today, so the investment in their home may be “under water” meaning that the mortgage is larger than the value of the house.

 

Their budgets were already tight prior to the summer run-up in gasoline prices; they can’t cut back on their driving because their commutes to work are long and no public transportation is available in the suburbs. The economy is threatening to slip into a recession, with the media fanning the flames of the possibility of a coming financial Armageddon. The savings rate remains below zero, though some economists argue that this calculation is flawed. Credit cards are maxed.

 

So why are Americans still buying jewelry? And even more importantly, why are jewelry sales gains stronger than total retail sales gains in recent periods?

 

There are two key answers.

 

• The high end of the consumer market – largely the 15 percent of all households with incomes higher than $100,000 who consume 50 percent of all the jewelry sold in America (by value) – remains financially strong. As a result, these consumers really haven’t cut back measurably on their spending. If anything, it appears that they have stepped up their spending for high-priced luxury goods.

• There is an old American adage that we’ve cited before: When the going gets tough, the tough go shopping. For all kinds of psychological reasons, Americans view shopping as a stress-relieving recreational and social activity.

Our outlook remains positive; we don’t agree with the doomsday forecasters. We think the stock market will close at a high level for the year; we think unemployment levels will remain moderate; we think interest rates will decline sharply; and we think the weak housing market may be near a bottom, though a recovery will be slow. In addition, there is plenty of evidence that business profits will remain strong – though they will slip from the current record highs – and the financial asset mix of most businesses is solid enough to weather any moderate decline in profitability.

 

Our current forecast for jewelry sales for the U.S. in 2007 calls for a 4.4 percent gain. This is 20 basis points higher than last month’s forecast. We’ll probably leave our forecast at that level until we see what actions the Federal Open Market Committee takes over the next sixty days. We’ll also watch their language closely, seeking clues to how they think the U.S. economy is doing.

 

Our advice to jewelers: inventory management will be critical in the coming three months. If you cut back on new goods, you won’t have anything new to entice your current customers. If you cut back on total inventory, you surely won’t sell as much because you won’t have enough merchandise. The best jewelers have sophisticated inventory management systems; you can’t afford to run your business by the seat of your pants any longer, if you plan to be around in subsequent years.

 

July Jewelry Sales Solid

Jewelry sales gains, both for specialty jewelers and for all retailers selling jewelry, were up in July. This was the second strongest month of the year, after January.

 

Demand for high-priced jewelry from guild jewelers was the driver among the specialty jewelers. Demand for better quality goods from other retailers drove jewelry demand at other retailers including discounters.

 

The graph below reflects jewelry sales at both specialty jewelers (red line) and all retailers (blue line) who sell jewelry. As is clear from the graph, consumers weren’t discriminating about where they purchased jewelry: both specialty jewelers and other merchants enjoyed brisk demand in July for jewelry.

 

Source: U.S. Dept. of Commerce

 

Specialty Jewelers Outperformed Average Retail Sales Gains

During July, jewelry sales gains were slightly stronger than demand for all retail goods. Total consumer spending on retail goods was up 4.6 percent, based on retail sales numbers from the Department of Commerce. Total consumer spending on all goods (there are some subtle differences in definitions), based on Bureau of Economic Analysis numbers, showed that consumer expenditures rose by a more moderate 4.3 percent in July. Either way, jewelry outperformed total retail by about 50 basis points during the month.

 

The graph below summarizes total retail sales from the Department of Commerce with total jewelry retail sales (same source); this is a true apples-to-apples comparison.

 

Source: U.S. Dept. of Commerce

 

Consumer Spending Holding Steady

While there has been some cyclicality in retail sales and jewelry demand, overall consumer spending on goods and services has remained steady.

 

The graph below summarizes trends in American’s total spending (blue line), retail sales of all goods (black line), and expenditures on jewelry (red line).

 

Source: U.S. Dept. of Commerce

Forecast: Strong Jewelry Demand for Balance of 2007

It is difficult to see sunny skies ahead when you are in the middle of a raging hurricane. The media would have us believe that we are in the middle of a financial tsunami. We don’t agree with that assessment. And we think that, while skies may be grey and uncertain today despite solid gains in July, sunny weather is just around the corner.

 

We don’t look for a shock to the system. It appears that oil prices may have peaked, and gasoline prices should be headed lower, especially as U.S. refiners process less-expensive winter-blend gasoline. Unemployment could rise a bit, but it won’t get dangerously high. The Fed is acting at a measured pace, as it should. Wall Street is typically impatient; historically, myopic investment bankers (of which I was one for twenty years) lurch from crisis to crisis. They, too, will see sunnier skies by year-end.  

 

The graph below summarizes our jewelry sales forecast for the American market for 2007.

 

Source: U.S. Dept. of Commerce, NIPA