With consumption the undisputed driver of US GDP growth, accounting for around 70% of economic activity, consumers are an essential component for investors to consider in their assessment of the overall health of the economy. On Friday, there were two important data points related to consumers that we believe offer insight into what is happening on the ground. Neither of these data points are a perfect proxy for the strength of the consumer, but together we think that they offer a pretty decent pulse on consumer spending. Here is a quick recap of some of the highlights from the latest data:
Retail Sales: Purchases in May unexpectedly fell 1.2% compared to expectations of a gain of 0.2%. This result was the weakest retail sales decline since September of 2009, and economists’ forecasts were not nearly bearish enough ranging from declines of 0.7% to growth of 1%. However, the silver lining in this disappointment is that nearly all of the decline can be attributed to slumping sales at building-material stores. Sales at this sector of retail slipped 9.3%, as government rebates for energy efficient appliances expired last month. Autos and spending on gasoline were also weaker than anticipated, which stems the improving trend in auto sales. However, as far as GDP is concerned, the impact will not be as bad as the headline number suggests. As Bloomberg points out,
“Excluding autos, gasoline and building materials, which are the figures used to calculate gross domestic product, sales increased 0.1 percent after a 0.2 percent April decrease.” – Bloomberg.com 6/11/2010
Furthermore, the Commerce Department also revised April’s sales figures upwards from gains of .4% to .6%. So, while this data suggests that the underlying spending environment is weaker than some would have hoped, it was not a complete disappointment. There was one glaring weakness—building materials—which had been manipulated by tax incentives (surged 8.4% last month). Other than that one factor, sales were still weak but not terrible considering well known labor market weakness.
Consumer Confidence: The June reading of the University of Michigan Consumer Sentiment Index rose to 75.5; its highest reading in more than two years. Consensus economists’ expectations called for 74.5, so the actual result was slightly more bullish. This upside surprise was more startling to us than was the downside surprise of retail sales considering the aforementioned sluggishness of the labor market and recent stock market weakness. It seems to us that there has been much more negative news lately, and investor sentiment has certainly slumped. Also, consumers were more likely to say now was a good time to buy big-ticket items than last month, and consumer expectations for inflation were also more subdued at 2.8% over the next twelve months versus 3.2% expectation in May.
In the end, we think the retail sales figure is less bad than the headlines would suggest. Furthermore, consumer confidence was much more resilient than we had expected to see, and this may portend better sales in the upcoming months. Our expectations remain unchanged; we are not expecting awesome growth from consumers in this environment where jobs are slow to be created. However, we also would not get too tightly wound around the headline decline of 1.2%, especially as consumers are generally feeling more positive about opening up their wallets.