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By Jason Stipp and Robert Johnson, CFA | 05-09-2012 11:00 AM

Consumers Not Spent Out Yet

Employment improvement, cooling commodity inflation, and lower interest on debt should allow consumer spending to sustain its moderate growth trajectory, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

Our director of economic analysis Bob Johnson keeps a very close eye on the consumer, and he says their spending has been pretty consistent, but will it be sustainable? He is here to offer his take today.

Bob, thanks for joining me.

Bob Johnson: Nice to be here.

Stipp: So the consumer spending, you said, although you some wiggles in the line month-to-month, when you look at it over a broader time period, has been a pretty consistent. What has the consumer spending trend been over a longer period of time here?

Johnson: Generally, on a year-over-year basis, the broadest measure, the government numbers, have been running around 2%. Now we actually had in the first quarter, with autos in particular, we had some acceleration on a year-over-year basis--the consumption number was up as high as 2.9%. Clearly, not a sustainable number, probably, but the 2% has been more consistent, and I think that's the broadest measure that we have.

Because once in a while, the autos ... get a little funky in the numbers, I do like to step back and look at the retail sales number, and there I like to look at the same-store sales report from the International Council of Shopping Centers, and we've been stuck very much in that 2.5% to 4% range on a same-store sales basis, and then you've got to add a little bit to that because they open more stores every year as well. But we've been stuck in that very narrow range, and that's not really what I'd call a boom, but it's certainly not a bust, and it has been remarkably consistent.

Stipp: Several factors feed into the ability for these trends to sustain themselves, and I think perhaps one of the most important, or at least the one that comes to mind first, are consumers' incomes. So they have to make money in order to be able to spend money. What trends are you seeing there that would suggest that this consumer spending trend can persist?

Johnson: Well certainly, on a year-over-year basis, employment continues to grow. We may have a report one month that we don't like, and then like the next one a lot, but overall you take all the bumps out of it, and we're growing employment about 2%, and that's a pretty good number, because the population is growing well less than 1%. So we really are outstripping population growth with growth in employment.

It takes awhile ... people get a job, it takes them a while to get established, get the first check, so [consumer spending] doesn't come instantaneously [with employment growth]. But we are seeing continued employment growth, and I think we all got a little scared that initial unemployment claims went up for a few weeks in a row, and then last week we had the big fall-off. So that seems to have stabilized a little bit.

The job openings report, which we got earlier this week, showed that new job openings were at kind of a recovery high, not that much better than the previous month, but nicely over year-ago level. So we're starting to turn the corner on employment, and I think that's probably, as you point out, the biggest driver.

Stipp: So going from no paycheck to having a paycheck is obviously going to give you the ability to spend more.

What about people who already have jobs, who have been able to maintain a job throughout the recovery--they haven't been making a whole lot more, necessarily, in their wages. So there is not a whole lot of extra gunpowder there for them to spend, right?

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