Falling real wages, rising jobless claims contribute to largest drop in the Index since November 2007.

The Deloitte Consumer Spending Index (the Index) fell significantly in April, showing the largest single month decline since November 2007. The Index tracks consumer cash flow as an indicator of future consumer spending.

"A sharp deterioration in real wages coupled with a rise in jobless claims weighed heavily on the Index in April," said Carl Steidtmann, Deloitte's chief economist and author of the monthly Index. "Growth in consumers' disposable income recently accelerated following a cut in Social Security taxes, giving consumers the means to spend. However, rising food and energy prices have started to undermine consumers' purchasing power, which may continue to lose ground to inflation in the months ahead, particularly if unemployment claims head higher."

The Index, which is comprised of four components — tax burden, initial unemployment claims, real wages, and real home prices — fell to 3.16 percent, from an upwardly revised gain of 3.78 percent a month ago.

"Consumers are spending at a steady pace but they will pull in the reins if inflation and employment jitters set in," said Alison Paul, vice chairman and U.S. retail sector leader, Deloitte LLP. "Retailers pulled many of the levers of cost reduction during the recession, leaving little room to absorb price increases from their suppliers. The emphasis now is on precision retailing, using customer data to accurately read demand and improve inventory management, localized assortment, and pricing strategy."

Highlights of the index include:

Tax burden: The tax burden is up from a year ago, from 9.1 to 9.7 percent of personal income. While a rising tax burden is typically a sign of an improving economy, there was little change in the most recent report.

Initial unemployment claims: After breaking below the 400,000 barrier, initial unemployment claims shot up to 471,000 in recent weeks, raising doubts as to whether this past improvement will endure. While this may be a temporary respite from recent improvements, it could negatively impact consumer spending should claims continue to rise.

Real wages: Real wage growth has contracted in the most recent month and is down 1 percent from a year ago. Rising food and energy prices are primarily undermining consumer purchasing power. The recent breakdown in oil prices might be a harbinger of improved real wages in future months.

Real home prices: Inflation-adjusted prices for new homes were down sharply from a year ago; however, the pace of decline appears to be slowing. The growing glut of foreclosed homes puts downward pressure on prices while mortgage financing remains difficult to obtain. Some estimates put the supply of unsold existing homes as high as 11 million, nearly two years of demand at current sales rates.

For more information about Deloitte's retail sector, please visit www.deloitte.com/us/retail