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By Jason Stipp | 07-13-2011 11:30 AM

Consumer Spending: Are You Buying It?

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?

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