Wed, 13 Jul 2011
Morningstar's Bob Johnson on the effect of discounts, higher-end consumers, and high gas prices on the sustainability of consumer spending.
Bob Johnson is on vacation, so in place of his regular written column this week, we're featuring this video report, taped on July 13.
Jason Stipp: I'm Jason Stipp for Morningstar.
Although, we've seen a few bumps in the economy in 2011, consumers seem to still be out there spending. But what's behind this trend, and how sustainable is it?
Here with me to offer some insights on that is Morningstar's Bob Johnson, director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So the first question for you: You look at weekly sales reports from the International Council of Shopping Centers to get a sense on how the consumer is doing.
So, we've seen a lot of rockiness in the economy, but one thing that you've been pointing to week-after-week in your reports is that the consumer still seems to be out there, and this has really been a bright spot for us. What have you seen in those numbers? What's the trend?
Johnson: We've had pretty good weekly numbers since about the middle of 2010. We've been growing somewhere between 2.5% and 3.5% on a year-over-year basis for some time. It seems like we just had a little bout where we went down and touched the bottom of that range at 2.5%, and now we've had three very good weeks, and in fact we had the most recent week come out with 5.5% year-over-year growth--some acceleration. It was kind of a perfect storm of good things. We had some favorable weather--one of the warmest starts to July we've had in some time. And we had falling gasoline prices. So, we had a couple of things come together that really gave us one of the best weeks in a long, long time this first week of July.
Stipp: So, a few factors were causing the sales to slump a little bit; those same factors reversing caused a bit of a recovery there. So, you have to keep those things in mind.
What about the discounting that's been going on? Because we saw that for a lot of the retailers, sales looked pretty good, but we also saw there was a lot of discounting activity as well. How important are those discounts to getting people to open up their wallets?
Johnson: I think they all are important, and as an economist, I'd love to see more volumes and decreased prices--that's what I like to see, and that's what really is going to help us out of this little rough patch we're having here. So, I think the fact that the stores have been willing to discount has been a big help to boost consumer spending. We saw a lot of it. It was probably related to having some seasonal stuff left over, because we had such a cool May, and retailers were stocked with more summer stuff in June than they'd like. So, there was some discounting that went on, and I think some of that discounting continued into the Fourth of July holiday, and lot of retailers cited some of the promotions really worked.
Stipp: I want to talk a little bit about who is doing the spending. So some of our readers have commented on recent pieces that they have this sense of these two Americas, a dual America. There are these folks who do have the money, a small percentage, and then there is the rest. And it's these folks that have money that are going out and spending it, but they can also quickly stop spending it, because they are doing a lot of discretionary spending. So, how at risk is this consumer spending, because it could be weighted toward the richer, smaller minority while a lot of folks out there are still really strapped?
Johnson: You've really hit it down the head, because so far in this recovery, we've seen Nordstrom, Saks, and Tiffany all doing exceptionally well, and Wal-Mart doing very poorly. They've had some merchandising issues at Wal-Mart, too. But clearly the high-end has done better, and we've seen 10% year-over-year growth typically out of the high-end guys, and more like 2%-4% out of more Middle America companies like Kohl's or Target. So, clearly we've had this bimodal economy, if you will.
I suppose the one piece of good news is, we saw the falling gasoline prices in June, and all of a sudden the discounters started to come up from the low 2% to maybe more like 5% growth, even some of the drugstore sales moved up a little bit. So we had some convergence the minute gas prices started to come down, and the markets softened a lot bit. I think it's a good thing to see a more balanced recovery rather than have it all be in the hands of the rich, so to speak.
Stipp: Do you think that we could be more at risk of poor sentiment really having an effect on the consumer numbers? So, if a lot of the spending, at least right now, is that smaller group that is able to spend and they can pull back if the market doesn't do quite as well, is sentiment going to be a bigger swing factor at this point in what we are seeing?
Johnson: We've got to be careful how we measure sentiment; you know what I think of sentiment indexes, right? They are not worth the paper they are printed on.
That's why I started watching these weekly sales data so closely, and then the monthly analysis that comes with those same sales reports, because they are very, very helpful interpreting what's going on.
I think a change in sentiment is so important, because at the high-end those people, like you say, don't have to spend, and I'm a little fearful that if we have a really rocky stock market, that those people will pull back a little bit; that certainly is one of my biggest areas of concern.
The good news is when we tend to have the stock market pull back, then commodity prices tend to fall, too, and then maybe you get a little bit more spending on the low end that maybe offsets some of the bad news at the high end.
Stipp: So those folks who are living more paycheck to paycheck, what are some of the factors that you look at to gauge, what is their actual spending power? So, you mentioned that commodity prices came in a little bit, that freed up some cash for them, and they seem to be going out and spending that when they are able to.
What other factors do you look at to get a sense of, what is their spending power? How are they doing on paychecks? How are they doing on savings, and what's the core strength of this group?
Johnson: Well, by individual groups, it's hard, but certainly at the low end, they spend a lot more on food and energy than people at the high end of the market …
Stipp: ... as a percentage ...
Johnson: As a percentage. Close to a third for low-income people goes to basic necessities, and it's less than 20% for the high end. So they are much more affected. One of the ways you see it: There was a story in the International Council of Shopping Centers' latest release that talked about one discounter, and he said, once the paychecks came out, things got slower and slower in June, and then the paychecks came out July 1, and they had the best one-day sales for the year on the day that the paychecks were issued by most people in the economy.
Stipp: So looking at their paychecks, we've seen that the real rate of paycheck growth, salary growth, hasn't been that great recently. Where are we with that? So it doesn't seem like the nominal raises have been doing much good lately.
Johnson: That's absolutely right. It's amazing, since the recession started, we have been at a 2% nominal growth rate; the checks go up about 2% every year. The bad news is that inflation goes up and down. In one period, we had deflation, so we actually ended up with paychecks that were increasing more than the nominal rate, something like 3% or 4%. And that's what brought us out of the recession.
Now we've got the same 2% growth and everybody thinks they're getting the same, but now with 3%-5% inflation, it wipes out all of that gain, and that's why we're hurting right now.
Stipp: That's why it's so important right now to keep an eye on what inflation is doing. It's going to have a big impact on the real spending power.
What about their savings, Bob? So we know that we got way over-leveraged during the housing boom. How are we now, and how much dry powder do we have?
Johnson: Well, there are two things I'd like to look at there. One is the savings rate. Again, remember we got as low as 1%, maybe even a little under that briefly, for a savings rate. And we got as high as 7% when things were really bad in the recession, nobody would buy anything. And now, we're kind of in the 5% range. So we've got a little bit of dry powder there, where people can dip a little bit into savings and help the economy out, if they find the right buys out there. And ... I'm optimistic on that. Now, I am not advocating going back to 1%, but could we fall back to 3.5%, 4% for a month or two ... absolutely.
Stipp: You also look at some metrics that measure the total debt--credit card debt and other debt--versus the money that's coming in. What are those telling you about where the paycheck is going?
Johnson: I think that's a big undiscovered story. If you take a ratio of mortgage payments, credit card payments, auto payments, and wrap all of those together and compare it to income, that number got as high as 19%. The record low was 15% and some. Now we're close to 16% again. So, we've really come back in, and I think that's what a lot of people miss is how well we've done on that front.
Again, people also talk about underwater housing and what a problem that is, but at the same time, mortgage payments have fallen substantially for those people buying a new home and since the crisis began, we've sold about 20 million homes at these new discounted rates, and that's a pretty healthy percentage of the overall housing stock.
Stipp: Okay. So we talked about who is spending and what their spending power has been and what it could be. What are they spending on? What's the mix that you're seeing in those reports?
Johnson: Well, we've certainly seen a lot of luxury good spending, a lot of spending on goods, but what we've seen less spending on is services. People will buy an iPad and people will buy a car, but people have really kind of pinched on say an airline ticket, haircut, massage, whatever. All of those categories remain pretty soft. So I think that so far is the pattern that we've seen, and I'd hope that we'd see a little broadening out to the services, but we just haven't really gotten that going yet.
Stipp: Lastly, Bob, as you're looking out for the second half of the year, I know that the consumer is obviously a big part of how well the economy does, being 70% of the U.S. economy. What are you looking for in retail sales to reach your overall economic forecast. What do you need to see?
Johnson: Well, on a same-store basis, we've been running 2.5% to 3.5% for some time, and we just went through a soft spot, where we went through the 2.5% part of the curve. And we've had three great weeks, and it looks like we are on our way back up to the 3.5% part of the curve, and I'd love to see that, and I'd love to see the numbers be relatively consistent. It doesn't do me any good to have 9% one month and 0% the next; it averages out to 4.5%, and we've had a few months like that.
And so I'm more concerned that it's level, that it doesn't get so low that everybody is really scared one month and then everybody gets to the other side of the boat and gets really optimistic the next. I'd really like to see a nice, steady growth rate, and I'd say maybe just a little higher--we've been more in the 2.5% to 3% range; I'd like to see more of the 3% to 3.5% end of the range for the rest of the year. That's what I'd really like to see.
Stipp: But one thing that you can't do, as we've seen and as you've mentioned, because of that volatility, you can't necessarily just look at one month's numbers--a lot of times you have to average a few months to get a sense of whether we are really near that 3%-3.5%.
Johnson: Right, and unfortunately with the July numbers, they'll be really good numbers, but we've got to remember to ratchet down because a lot of good things did happen in July.
Stipp: All right, Bob, some great insights on the all-important consumer. Thanks for joining me today.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.