Thu, 29 Dec 2011
Lower inflation trends plus an upcoming Social Security cost-of-living adjustment should contribute to consumers' staying power, says Morningstar's Bob Johnson.
Jason Stipp: I’m Jason Stipp for Morningstar. It looks like retailers had a pretty good holiday season, but the question now is, will consumers keep spending into the New Year? Here with me to offer his insights is Morningstar’s Bob Johnson, director of economic analysis. Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So as you look at the some of the data on consumer spending and retail sales over the holiday season, what does it look like? Did they have a pretty good season?
Johnson: They did. I think the numbers came out better than anybody thought when we started the holiday season. There are still not perfect, but the last few weeks of the season were particularly good. So we had a really strong early part of the season and a really strong end of the season. The middle was a little bit dicier, November in particular. But we certainly closed strong.
Stipp: So, I know that you look at the International Council of Shopping Center data, and it's weekly data that comes out. What does the trend in that data tell you about how retailers were doing over this time period?
Johnson: Well, let me put it in some perspective. The retail sales have been up on a weekly basis about 2.5% to 4% [year-over-year] practically since the recovery began. And everybody talks about the wild swings, but when you really look at retail spending, it’s been in that very narrow range of 2.5% to 4%.
In October-November, we got down to that low end of the range at 2.5%. The data for the most recent week was 4.5% year-over-year growth, and this week might have been a little bit special, because of the way the calendar fell. But even last week was kind of a 4% year-over-year gain. So, I think that we really have shown some acceleration here in retail spending. Consumers have been more willing to spend. That’s for sure.
Stipp: So definitely some resilience on the consumer front.
We also recently got data, though, on consumer income and consumer expenditures, and the consumer income piece didn’t necessarily show robust growth in their income. So the first question for you, then, is, if consumer incomes aren’t increasing, but their spending is increasing, that means they must be spending down their savings.
Johnson: Right. I think that’s the right conclusion. Again, I’m trying to stay off talking about the monthly squiggles a little bit, because the income numbers are so dicey and change a lot. But on year-over-year basis, let’s face it, the real disposable income--that’s adjusted for inflation, adjusted for taxes, and it includes all sources of income--when you look at that measure, we are basically flat on a year-over-year basis, and at the same time, spending in the most comprehensive measure, is probably up somewhere between 1.5% and 2%.
Stipp: So let’s dig in a little bit and try to understand what some of the sources of income are, because there are few specifics about the income sources that are important to keep in mind, when you look at it broadly and you see the top line number. But let’s just look at wages first. So have wages really been as stagnant as people say they’ve been.
Johnson: Well, they aren’t absolutely wonderful, but when you look at the total wage dollars paid in the economy, we are up, and up about the same as spending is up. The wage data ... comprises about two-thirds of all consumers' incomes--they also get rents and they get dividends and they get small business profits. So there are a lot of things that are in there, and you subtract out taxes. And so there are a lot of factors that complicate the total income number.
But the wage data seems to be more in line with spending. It doesn't make it look like the consumer has been spending every last dime quite the way the savings number does.
Stipp: So consumers might not be stretching that take-home paycheck as far as you might think by looking at the overall data.
So, also we know that unemployment benefits have expired for some folks. How much is that playing into the income data?
Johnson: Well, certainly that's down on a year-over-year basis, and that's certainly one of the things holding back the number.
Stipp: So people who still have jobs, though, you have to adjust for the fact that unemployment insurance is not one of their sources of income.
Johnson: ...is not affecting them, right.
Stipp: Then you mentioned taxes before. Did we see an increase in the amount of money that taxes are subtracting from the income portion of your statement?
Johnson: Yes, the growth rate in taxes has been absolutely huge, and I think a lot of that is probably capital gains income now coming back again with the market being up, and now taxes on that. Some of the higher-bracket people are doing better, and they get a higher percentage of their income taxed. So that might be another factor that's causing the taxes to go up. I think the average Joe Blow in the street isn't seeing a huge tax increase, but I think maybe people in the higher brackets are a little less sensitive, are the ones bearing that burden, but in the overall number it looks like, "Gee, there's no money for anybody to spend."
Stipp: So those folks that maybe are paying a bit more in dividend [or capital gains] taxes, they probably are higher-income folks anyway, and their spending is probably going to be more dependent on their confidence in the economy more so than their absolute income level from month-to-month or year to year.
Johnson: And I think there are a couple of other things at work, too. The wage growth may not have been quite as good as consumption was, and there are a few things going on. I think as inflation started to come down at the end of the year, I think people said, "Ah! I see a break in this," and they started shopping almost in advance of those savings, and maybe even when prices went up initially, they said, "You know what, ... it seems like it's just going to come back up and down. I'm not changing the way I live based on a couple months of CPI data." You know, we don't all think that way. And so I think that's out there. And then I think there are some positive factors we could look forward to next year, too.
Stipp: So, let's talk about that. So if you're looking at the trends now, and if we see that wages continue to grow at the modest rate that they are still growing. If we see consumer spending continue about that same level, do you think this is something can persist? Or what triggers do think would lead to more consumer spending or what needs to happen for ... better grow there?
Johnson: Well I think there are a few positive things that we may see next year on the income front. Obviously, one of the big ones is starting in January, we get a bigger Social Security increase; we get another nice hike in that, and we didn't have one the last couple of years. So now we are going to get a little bit of benefit from Social Security payments. So that's out there.
I think the second thing with income is [inflation]--the number that really hurt us. The absolute numbers have been OK in personal income, but there's been this huge inflation number. At one point on a year-over-year [basis,] we got pretty close to 4% inflation, which is my real worry point. It looks like for the full year, we'll close down at 3.1%, and next year I think we could get that number down close to 2% again in terms of inflation.
So, I keep on saying real or inflation-adjusted, but that's a part of what really killed this year's set of number was the inflation adjustment. You looked at the numbers just on a nominal [basis], not adjusted for inflation, 2010 and 2011 looked the same. But then when you adjust it for inflation, 2011 didn't look so good.
Stipp: So when you dig into the surface, it looks like consumers may have a bit more dry powder than it would initially seem?
Johnson: Yep--given the inflation [moderation], given Social Security, and given that the tax [liabilities] may have [primarily affected] the higher-bracket people--all combined, the income may be a little bit more than people think.
Stipp: All right, Bob. Thanks for the insights on the consumer and personal expenditures and income today.
Johnson: Thank you.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.