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By Jason Stipp | 07-14-2010 01:12 PM

The Consumer Will Come Back in the Second Half

Morningstar's Bob Johnson sees consumer spending picking up from current levels in the second half of 2010.

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Jason Stipp: I'm Jason Stipp for Morningstar. The government reported retail sales for June on Wednesday and the numbers were down 0.5% for the month of June. This wasn't necessarily unexpected to Morningstar's Bob Johnson, our Associate Director of Economic Analysis. He's here to explain a little bit about what he had been expecting for the report and what he's seeing in the back half of the year for consumer spending.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So the headline number was a little bit lower than some people had forecasted, but you wrote last week that you weren't expecting great things out of this number. What was your take on the headline number and how did that meet with your expectations?

Johnson: It was pretty much inline with what I was thinking and the key thing in the retail sales number to keep in mind this time. This is the most comprehensive government report. We talked a little bit about last week about the individual stores. This is the one. It's got everything from gasoline, to restaurants, to retail stores in there.

So this is the most comprehensive report. It's very hard to call and you got to be very careful about analyzing the data in that report because there is so much in it.

Stipp: One of the things in the report as well is its capturing prices, but so if prices in some areas go down, then that's going to affect it. So it's not really adjusted for inflation in other words?

Johnson: That's correct. At the end of the month when we see the personal consumption numbers, which are based a lot on these numbers those will be inflation adjusted. These numbers are just kind of raw numbers.

Stipp: So let's take into it a little bit and talk about some of things that were up, some of the things that actually showed some positive results when you start to dig in and look in the different categories in there. What were some of the things you saw?

Johnson: Sure. I think there were a lot more categories up than down. I mean, the autos is a big weight on this. If you take the autos out, we were only down a tenth or so, and if you take gasoline out of there, you're actually, in addition to the autos, we're up a tenth on the overall set of numbers.

Stipp: And gasoline a volatile one, where the prices can change a lot and really have an effect here?

Johnson: Right. They're going to have a big effect on the reported number, but when we get to the end of the month and get the full consumer spending report those are adjusted for inflation.

Stipp: So in some of categories, what did you see that was on the positive side?

Johnson: Sure. I think you saw a lot of categories – electronics looked very good again and it's one that we've heard about last week. In the first quarter, it was a good strong category. This time, I think it was also a strong category. You saw personal healthcare spending looked pretty good in the quarter. Department stores were another real strength, up over a percent month-to-month. That's like a 12% increase, if you annualize the number.

So it's good to see those types of stores doing well. Apparel did well, just kind of sometimes a discretionary item. May be the warm weather helped a little bit, but certainly that was another category that was up.

Stipp: You checked in with some of our retail analysts for some additional color on some of these categories, and for electronics, it wasn't necessarily the big ticket purchases of TVs and stereos and things like that, but there was a little bit some texture underneath there?

Johnson: It's very interesting. TV sales have not been quite as strong over the summer here and have actually been a little bit weak. So they were little surprised. I told them overall electronics number, but we dug into a little bit and decided it was things like computers, the iPads going out and a lot of the smartphones that fall in this electronics category. They were responsible for driving a lot of the sales worth, which was good and actually accelerated from May to June.

Stipp: So some of those new products from Apple certainly got people excited about certain segments within electronics, probable spread some sales there. And there's also some interesting differentiation on restaurants. So some restaurants did better than others and I think restaurants give you a sense of where consumers are feeling. It's kind of a discretionary expense. What did you see on restaurants?

Johnson: Overall, the category is up two-tenths of a percent month-to-month, and so that only annualizes about 2.5%. So not a great number, and our analysts tells they are seeing a real dichotomy, some of it, what we call, casual restaurants, the T.G.I. Friday's and whatever, that people might think of taking their families to as kind of a treat, are actually beginning to do a little bit better.

On the other hand, the quick-service restaurants, real fast food, burger type of joint, those sales are still suffering and the reason is that those are tied a little bit closer to employment, because people tend to dash out of those in between their lunch-hour period or off from the construction site or whatever into a quick-service restaurant and that business is still really quite weak.

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