Wed, 18 Apr 2012
Morningstar's Bob Johnson explains why the various consumer spending reports show different levels of growth--and what each one is really indicating today.
Jason Stipp: I'm Jason Stipp for Morningstar.
We've said time and again that the consumer is the most important thing to watch at this point in the recovery.
Morningstar's Bob Johnson, our director of economic analysis, looks to three separate reports to get a handle on the consumer. Each one has its quirks. He's here to tell us a little bit about them, and what he's looking for in each. Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So, there are three reports that you look at. There's one that you have often mentioned in videos that we've done. It's one of your favorite reports, actually. It's the weekly report on consumers. Let's start there--what that report is and what some of its quirks are.
Johnson: It's from the International Council of Shopping Centers, and it's a report that's gathered from asking a relatively small number of companies--most of them in malls obviously--what their weekly sales were, and they use that data to extrapolate what the rest of their universe did. But we do get the report every week.
Stipp: And these are so-called same-store sales. So they are looking at stores that have already been opened for a while and how they did during that reporting period. How does that affect the numbers?
Johnson: Obviously, as they open and close stores, the total sales from all stores will be different from the same-store sales report, but the retail industry is very much looking at same-store sales. If you open more stores, that really doesn't count as being something that's really good for a business. It just means you opened more stores. So, people like to look at the metric of same-store sales. That's how the International Council of Shopping Centers reports it. But [the total retail sales] number is really higher than that, ... because [companies] open new stores.
Stipp: And when you are looking at that number, given those factors, what has it tended to be? So it would be lower than obviously a full retail sales growth number. What's the trend there?
Johnson: This number is not inflation-adjusted, and it runs about 2.5% to 4% [growth] is what it has run in this recovery. Now, ... in a recession you may get down a couple percent on this metric, and in a really boom time, you might get near 6%, but that's kind of the realm of possibilities.
Stipp: So, in that range, is there a number where you get worried if it starts to dip? What is that worry number for you?
Johnson: That number is 2.5%.
Johnson: In this recovery, we have not dipped below that, and ... three times we've struck that line and bounced back off. I think if we ever go down through it, that probably means we are down for a serious slowing.
Stipp: So that's great weekly data; you get that data more often.
The second report, actually one that we got this week, is the retail sales report from the government. It's figured in a very different way. What are some of the quirks about that report?
Johnson: That one includes automobiles in it. That's a very volatile series, and it's not even used to construct the GDP report ([the GDP report] actually uses numbers from the auto companies, not from this retail sales report), and that's a hefty 15% to 20% of the report. So, a lot of times you'll see the number excluding autos, and that's the way you should really think about it. That's quirk number one.
It reports all sales, not just same-store sales, so it's going to look like a bigger number than the other report that I talked about. It's going to be a bigger number by about 3%.
Stipp: Okay. So ... you are seeing an average around 5% or 6% [growth], perhaps, with that number.
Johnson: This recovery, yes.
Stipp: And has there been a number there where you would start to get worried if you saw a dip, or is this one really much more volatile and harder to gauge?
Johnson: This one is a little bit harder to gauge, and I’d have to play this carefully. But I would think if we dropped down below 4% [growth] there, we'd certainly have a problem.
Stipp: And you mentioned something else about this report, the way that they calculate it. It’s subject to revisions, which can sometimes be pretty big revisions. What’s behind that?
Johnson: This report is a survey, and the first report, the International Council of Shopping Centers, is based on asking a fairly small number of chains. So it’s pretty reliable. You get pretty much the same companies reporting, and it’s a pretty professional set of data that’s pretty comprehensive. But the problem [with that report] is they are only asking a few stores.
Now [the government retail sales] report asks about 5,000 businesses three days before ... the month's over what their sales were and to mail it back. And they get about a 50% response rate to that. Then after the month is actually over they send out another batch of them to 8,000 additional companies, and that will help them make the next revision of the data.
And then finally the third revision of the data, they will take all of those [responses] altogether, and they will get about a 70% to 75% response rate. So it’s a survey, and so they are not having the actual numbers and so they are subject to a lot of revision.
Stipp: So given that this number can be volatile, has some quirks to it, how do you actually like to look at the number? You don't just look at that raw number every month and make your conclusions, right?
Johnson: That’s right. Like I’m doing with more and more of my indicators, I [look at] a three-month moving average, year-over-year ... and that way we can take some of the weather out of there. I have talked about antiquated seasonality factors across a lot of sectors, and I think that’s another worry here. And so that’s how I like to look at the numbers, and again the number right now is about 5.9-6.0%.
Stipp: And as I had mentioned earlier Bob, this government number is actually data that we got this week, and it was a pretty good report. What did that report say to you?
Johnson: That’s right. On a month-to-month basis, which is not the way I like to look at it, it was up eight-tenths of a percent. People were looking for 0.3%. And again, if we annualize it, that gets you up to a pretty high number, almost 10%. So it’s a really good number--a lot of that was a good auto sales number.
But actually almost every category [was up], except I think the drugstores were down. But it was a very good number. Now some of it was fueled by gasoline and so forth. But overall a very strong number, and it sent everybody back to the drawing board thinking that maybe consumption growth in the first quarter is going to be up from the December quarter--and now [the quarterly growth] is going to be something probably close to 2.5%, which might actually help drive GDP up about the same rate, maybe a little more.
Stipp: ... The last [consumer] number, Bob, when you hear people say that the consumer is 70% of the economy, that’s the consumer number that goes into GDP, and that’s figured, as you mentioned before, in an entirely different way.
So how do we look at consumer when we are looking at this consumption report?
Johnson: The consumption report first of all, the worst thing about that is it comes a month late. So in a week or two we'll get the report for March. And it will practically be ... May, and we are going to get the March report. So it's kind of stale data. And that’s the biggest problem with the report.
The good news about the report is that everything is inflation adjusted, not just for the changes in price levels overall, but say the price of gasoline went up, they will back out and [calculate] how many gallons gasoline were actually involved here, so that it's really an apples-to-apples type of report. So that’s really good about it.
The other problem with it, though, is that there are things in there [such as] owner equivalent rent, that’s how they figure what you spend on housing, [but it] is not what you are actually laying out for your housing, it's what they figure you'd owe in rent. So it's not an actual number, and its relatively big part of the report. So it tends to damp down the volatility of the number a little bit, and it tends to make the consumption number a smaller number than you see in any of the other reports.
Stipp: And there are some other things included in there, including health care. We obviously see inflation there, but they back that inflation out. But health care tends to be not a really discretionary spending cost, so you can’t really get a good sense of if the consumer is picking up traction or not with all those fixed costs in there.
Johnson: So a third of that big consumption report is the housing and the health care. So you get this giant lineup, where you've got this weekly report that says we are kind of in a 2.5%-3% growth rate. You've got the government report that says 6%, but that’s because of the same-store sales adjustment. Then you've got consumption that looks like 2%, but that's really the 6% number minus 3% for inflation, so you are at 3%, and then there is little bit of [adjustment] for the housing metric, and so you are back to 2%.
So that’s how the numbers stack up, and why you may scratch your head and say, "I thought I heard 6% the other day; now I am hearing 2%." That’s how you get to those differences.
Stipp: So last question on that consumption number. What kind of range do you expect to see throughout different kinds of economic environments, and where would you start to say we are really slipping with our consumption component of GDP.
Johnson: Again that number, because it has a lot of ballast to it if you will, it doesn’t get as negative as a lot of other numbers. I think even in the 2000 recession, it only went down like a couple of tenths. So it is less volatile series.
Stipp: Well it sounds like some interesting ways to get a handle on the consumer--somewhat confusing--but thanks for helping to clarify these reports and what we can pull out of them today.
Johnson: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.