This article, by Hedda T. Schupak, Jewelry Market and Retail Analyst, is reprinted courtesy of the Israel Diamond Portal (www.israelidiamond.co.il).

By now, most pundits are in agreement that the American economy has hit bottom and is poised to begin a turnaround before the end of 2009. According to a report from the Wells Fargo Securities Economics Group, signs point to a fairly robust recovery, as well.

Some of the promising signs include upticks in consumer confidence, home and auto sales, and durable goods orders. While the home and auto increases were largely driven by the government’s economic stimulus programs—and therefore the improvements are somewhat exaggerated—economists believe those gains should still translate into some GDP growth in the near term. Both categories support a wide range of feeder and aftermarket industries, as well.

Consumers also are feeling more confident. The Consumer Confidence Index of expectations about the economy rose a whopping 6.7 points in August, to 54.1. And, the reappointment of Ben Bernanke as Fed chairman should help alleviate some of the uncertainty about future monetary policy that may have been hampering markets, though high budget deficits still will have an effect on fiscal policy.

Globally, most of Asia enjoyed economic growth in the second quarter; current data point to this continuing into the third. Latin America is lagging behind somewhat, though indicators there also point to a turnaround soon. In Europe, we see encouraging news from Germany—in August the Ifo Business Sentiment reached its highest point since last September. As Germany is the EU’s largest economy, this is welcome news.

Encouraging Signs, But It’s Not Over Yet

What does all this mean for diamonds and fine jewelry? While these positive economic signs are certainly better than negative economic signs, the industry is far from being in a position to let out its collective breath.

We’ll focus here on U.S. spending as it still accounts for approximately 50% of the total global consumer market.

On the economic front, the gains in consumer confidence in the United States are related more to future expectations stemming from recent positive performance of the stock market and better news on the housing market; they’re not a reflection of attitudes about current conditions. The current-conditions index has barely budged—and even with its 6.7-point improvement, the overall confidence index still is very low at 54.1.

The key driver for consumer spending remains employment. Consumer confidence trends generally mirror employment trends, and employment is the last area to rebound in a recovery. The good news is that first-time unemployment insurance claims have dropped, suggesting that the massive waves of layoffs may be nearing an end.

 But overall claims remain high and, disturbingly, the number of people having exhausted their original benefits and applying for extended benefits has shown a huge increase—indicating that new jobs aren’t there.

Challenges To Be Faced By The Diamond And Jewelry Industries

The diamond and jewelry industries’ own challenges are magnified by the current economic situation. Here are some of the key issues we face in our industry:

• The established financial model, heavily dependent on credit, not only must change, it will be forced to change very quickly. The rate of change is likely to be far more impactful than the fact of the change itself. As banks tighten credit in all sectors from mortgage lending to credit cards to business lending, diamond dealers and suppliers who don’t have enormous cash reserves of their own will no longer be able to act as banks or stockrooms for their customers—and may not have much warning, either. Banks may be unwilling to lend against receivables more than 30 days old—if that—and some of the high-profile bankruptcies in the industry have proven that even if memo goods ultimately get reclaimed, it’s a lengthy and arduous process.
  
• Retailers also must become better at cash management. As suppliers increasingly become unwilling or unable to finance their inventory through memo or extended terms, retailers who aren’t in a position to pay upfront may find themselves without goods to sell.
  
• The U.S. consumer is showing a decided preference for restraint. While recent spending patterns are probably better described as austerity—and these will ease as conditions improve—shoppers are likely to remain price-conscious and opt for good quality midlevel brands over high-status luxury brands. Status is out, and consumers are focusing on goods that have some benefit beyond mere self-indulgence; “green” and “socially responsible” are important attributes. A direct quote overheard from an affluent female consumer in the handbag department at Nordstrom this week: “I like a good bag, but I don’t want everyone knowing what I have.”
  
• A better barometer of American consumer sentiment will be available soon, as the back-to-school shopping season winds down. BTS traditionally has been a fairly reliable harbinger of holiday sales, as measuring consumer attitudes toward shopping at this period (necessities vs. luxuries and at what price points each are purchased) is a good predictor of spending intentions for holiday. (At press time, BTS 2009 is down vs. 2008; however, much of the current banking, mortgage, and credit crises hadn’t been fully realized during BTS 2008.)

According to an August 26 article in Women’s Wear Daily, retailers already are not bullish on holiday 2009—most expect sales to be flat if not down a percentage point or two from last year. That said, however, profit margins are likely to be up as a result of conservative buying and fewer markdowns.

Consumers are still showing a greater preference for saving over spending, and in terms of spending, for bargain shopping. Almost every luxury retailer surveyed by WWD said it is increasing the amount of product being offered at lower price points.

Fashion trends favor big ornate jewelry—which at present seems to be helping the costume jewelry sector most. At recent jewelry shows, fashion-forward bridge jewelry vendors were the ones whose booths were mobbed, and, indeed, most of the fashion-forward looks executed in fine jewelry materials would be cost prohibitive.

Jewelry Industry May Face A Sea Change In Taste Preferences

The fine jewelry industry may be facing a sea change in taste preferences as Baby Boom customers mature out of the jewelry-buying cycle and Gen-Y, or Millennials, come of age to buy fine jewelry. Even apart from economic considerations (Boomers racing to rebuild retirement portfolios), the youngest Boomers are in their late 40s, and it’s been proven that consumption in general tends to drop after age 50.

Gen-X, the consumers between Boomers and Milliennials, is a demographic numbering 11% smaller than Boomers, so even if they can spend individually, taken as a whole they simply cannot match the spending level that jewelers serving the Boomers have grown used to. The next wave of megaconsumers is Gen-Y.

In the early going, this is proving to be worrisome, as already some better jewelers are saying “the kids don’t want this stuff,” or “they’re going to inherit it so they don’t see the need to buy it.” Indeed, a look at any of the leading younger fashion magazines’ editorials does not show a lot of traditional-style jewelry, and most jewelers are not carrying the funky, unusual products that younger consumers seem to prefer, nor are they generally comfortable with the way younger consumers like to receive messaging. Indeed, most jewelers themselves are Boomers, and there are relatively few young people entering the U.S. jewelry industry in the retail or manufacturing sector, apart from artisan designers.

The huge influx of Millennials approaching marriage age is good potential news for diamond engagement ring sales, but this group is entirely comfortable with online shopping and fully expects to price-shop, so traditional jewelers have a lot of work to do to get this customer into the store.

The good news is that the Millennial generation outnumbers the Boomers, and its spending potential is huge.  It has grown up with consumption and while its attitudes differ—this group is the leading edge of the green and socially-responsible consumer base—it is not morally opposed to shopping. Its tastes are different and its shopping habits are different but it has grown up consuming and is likely to continue doing so.

Overall, it also is the one age group that has not been traumatized by seeing its savings portfolio cut in half by the recession, so any future wave of rampant consumerism is likely to be kicked off by this group. The diamond and jewelry industry can benefit, but not if it doesn’t take appropriate action now.  JQ