Thu, 1 Dec 2011
Improving employment trends, moderating commodity prices, and an inability to defer some purchases any longer have been bolstering consumer spending, says Morningstar's Bob Johnson.
Jason Stipp: I am Jason Stipp for Morningstar.
With the holiday season in full swing, consumers are once again in the spotlight, and Morningstar's Bob Johnson, director of economic analysis, says they might have a few tailwinds at their back. He is here to explain why.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So, we do potentially have some good news for the consumer. We saw that they started off at the holiday season on Black Friday with some good momentum, and potentially they'll be able to keep that spending up.
There are several reasons why, you say, and the first one has to do with employment. We've got some data on that this week. What is that saying to you?
Johnson: Well, we got initial claims down to 381,000, which shows a considerably bigger drop than most people were looking for this week, which I think is very good news.
We've certainly now seem to have arrested the increases in the initial claims, and it certainly appears that any issue is more related the hiring side than the firing side. We really got the unemployment part of it pretty well beaten [with respect to] new people getting laid off. In fact, I don't know that we can get a lot better from here, maybe the number can go down to 350,000 but based on historical trends 340,000-350,000 is probably the best we can hope for.
Stipp: So, week to week that number is going to jiggle around a little bit.
Stipp: And I know that last week we saw a little bit of an increase in those initial claims; this week looked a little bit better. But the trend you are seeing, you are saying that that trend is looking a lot better, when you look at in over time?
Johnson: I mean, ever since the tsunami, when the numbers went way up into the mid-400,000s, now we're back down into the ... mid-300,000s or so. So, I'm pleased to see that.
Keep in mind at the peak of the recession we were up ... close to 700,000 initial claims. So, we've really almost cut that number in half now.
Stipp: Another thing that we watch very closely that has to do with the consumer is purchasing power--how much money they have left over after going to the gas station. What are gas prices looking like? And how is that helping consumers right now?
Johnson: Well, you know it couldn't have come at a better time. We've really seen a slow and steady decline in gasoline prices from $4 late this summer, now down to $3.30. So, we've really seen a nice comeback down in that. And that's been wonderful.
Whether we can sustain that forever is a little bit of a harder call, but right now, and during the holiday season, when we really need it, prices have really come back in, and that's a meaningful fallback in gasoline prices. We are still a little above where we were a year ago, but by February that won't even be true.
Stipp: Gas isn't the only place where we've seen some price relief. There are some other commodities as well. So, I know, earlier this year, cotton, for example, got very expensive. Have some of those commodities come off those highs now?
Johnson: Absolutely, and just about everything has--wheat, corn, soybeans, cotton are all considerably off [their highs]. Obviously, it takes a while for all that stuff to get passed through to the consumer; just like it was slow in passing it on the way up, it's going to be slow on the way down. So, we won't see it all right away. But certainly, I think we've broken the back of this commodity bubble just a little bit, and I think that's really good news for the consumer, especially, at the low end. And we've certainly seen them act a little better. Sales at some of the dollar stores have been great, even Wal-Mart has come back in here. So, some better news for the low-end consumer.
Stipp: A little bit more breathing space to spend.
Johnson: A little bit more breathing room.
Stipp: So, next week, we'll get some data that may confirm some of this. We'll get the CPI next week. What do you expect that number to say about the inflation situation?
Johnson: In ... October, we had a small decline, 0.1%. I think, for November, when the number comes out next week, we'll see a flat number, so that's two months in a row with essentially no inflation, and that's just really wonderful news for the consumer, who has been so far behind the eight ball because of rising prices. Now, this is going to put it back and reverse again, and I think that's just great news.
Stipp: Something else where you can get a sense of the consumers' health and purchasing power is this financial obligations ratio. What is that? And what are those figures telling you right now?
Johnson: People are kind of wondering where are people getting the wherewithal to do all this increased spending that we've seen over the last months, at the retail level anyway. And certainly part of it is because they've got less fixed payments to make than they have in the past. If you add together the combination of mortgage payments, car payments, lease payments, credit card payments, and you put those all together, that number got up to 19% at the peak in 2008 or so. Now, we're down to about 16%, on its way to 15%. So, that's money that can go straight into other spending on other categories. So, that is really good news.
And I think [it's something] a lot of people miss; that number doesn't show up ... in the consumption numbers and income numbers; it really doesn't show up there. And so, it's one of the ratios that I look at very closely, and we'll get another read on that in a couple of weeks. But we are certainly, I think, we are headed for a new record low. I think, we'll get down to 15% by the end of next year, which is a 4 percentage point improvement.
Stipp: So, consumers have these financial obligations. But one thing we also know, they'll put money into savings, especially when sentiment is bad or when they are feeling like their job might be on the line, something like that. So, what are the savings rates saying to you right now? Are folks saving more or saving less? And what does that mean for how much they're spending?
Johnson: Well, that's an extremely controversial point. I am glad you brought it up, because the savings rate has gone from a recession high of close to 6% now back down to something that's in the high 3 percentage range.
So, clearly some of the spending appears to have come out of savings, that is stock market gains or withdrawals from certain 401(k) accounts, and so forth. But I also think that the incomes are going to end up being understated. I think we're going to see the savings rate restated to a higher number in the months ahead. I think the income numbers are way understated. The tax collections are moving considerably higher than the wage data is, and people don't pay taxes unless they have to. So, I'm little bit thinking those numbers have to be modified upward.
Clearly, we modified all of the employment numbers, so they look much different than they did the first time around. In the first pass, you may not notice, but in the income data, what they do is they take the employment, take it times some type of average wage, and then once a quarter, they get the actual payroll data to see what was paid, and then feed that back into the numbers and then do all the necessary restatements, and they do that again at the end of the year when people file their taxes to get other real numbers.
So, clearly with the really crummy employment numbers on first report now being modified upward, I think you are going to see those income trends look better and maybe that savings rate fall-off won't look as dire as it has.
Stipp: And then what about the idea of pent-up demand? So it seems like we've been waiting for this pent-up demand to come out for quite a while, and I think certain crises overseas and the weather situations that we've had have kept people from maybe spending, but how long will that pent-up demand last before it just has to be released. Are you seeing it start to be released?
Johnson: We are absolutely seeing it. And one of the big areas, where we're seeing is in autos. I mean, even as we walk around our office, a lot of people are buying cars, and the reason they are buying cars is, you ask them, and they say, well, I couldn't wait any longer; it was falling apart. I had been putting this off for two or three years already, I have got to do something. And so we've seen the auto rate, we're now going to close out the year with close to a 14 million annual sales rate, and keep in mind in the bad year, or the full year recession, 2009, we got as low as a 10 million number.
Stipp: So, what's an average number there?
Johnson: 15 million to 18 million.
Stipp: So, much closer to the average than we've seen for quite a while.
Stipp: So, autos may benefit. What are some other ways that these consumer tailwinds might manifest in the market? Who else might benefit on the consumer side from this extra spending that may happen?
Johnson: Well, I am looking forward to even more on the leisure side. I think some of the hotel and vacation [industries] are likely to improve. I think that in general, services has been a little bit behind manufacturing, and that has changed a little bit last quarter, but I think again I'd look for people to spend a little bit more on services, on haircuts, manicures, pedicures, lawn services, all those kind of things, or snow shoveling or whatever it is this time of the year, rather than just all goods, all the time, like it was at the beginning of the recovery.
Stipp: Last question for you, Bob, what are the risks to this scenario? If Europe blows up, for example, and the eurozone dissolves, could that cause people to tighten up their purse strings again? What are you worried about that this might not come to pass?
Johnson: Well you know with all of the bad stuff that we had, including our U.S. deficit and downgrade and so forth in August, if consumers ... kept spending through that, I think they're going to keep spending. I think they see Europe and say, you know what, they're going to have their problems for a long time. They have. And it hasn't seemed to kill me yet.
So, I think they've kind of gotten tired of worrying about that maybe just at some point. ... And also, Europe is not a very important part of our GDP at all. It's ... about 3% of our GDP, and a lot of that is necessities, and it isn't going to go away even if Europe has a really bad time. So, I'm not really worried from that standpoint.
Where I have to worry is the banking industry, that we don't have another meltdown like we did in 2008 that was caused over here by our subprime mortgages. That's a little bit of a harder call; I think our banks in the U.S. are pretty well fixed that that won't be a big issue here, but with Europe, who knows? The banks own some of the government debt, and the government owns some of the banks, and it just gets very confusing, and ... it's very hard to see the way out of that.
Stipp: As you say even if sentiment does sour a bit, some of these purchases consumer just can't put off any longer even if they wanted to.
Stipp: All right, Bob. Thanks for joining me today and for your insights on the consumer and some trends hopefully that we'll see coming ahead.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.