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By Jason Stipp and Robert Johnson, CFA | 07-17-2012 10:30 AM

Consumers Not Running Scared

Although the retail sales data has slowed in recent months, other factors, including signs of life in housing, suggest the consumer is holding up.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government retail sales report for June, and it was pretty disappointing no matter how you slice it. So what's going on with the consumer right now? To get some insights, we're checking in with Morningstar's director of economic analysis, Bob Johnson.

Bob, thanks for being here.

Bob Johnson: Great to be here.

Stipp: So we have the retail sales report for June. You look at it in a number of different ways. Top line though was disappointing. It was the third consecutive decline. What did it look like at the very top, and then how do you look at the report, as well?

Johnson: It was down 0.05%, and it's a third decline in a row as you mentioned. And this is a measure of retail sales, which accounts for about a third of total consumption that goes in the gross domestic product report. So it is an important report. It was down on a month-to-month basis, that is comparing June with May, and almost every category was down with maybe the exception of online buying. Otherwise almost every category was down, which really kind of came as quite a surprise.

Stipp: You make a few adjustments in the way that you look at the data. You take a certain slice of it, and it was also showing some deceleration there, as well. What trends are you seeing in the way that you look at the data?

Johnson: It isn't nearly as bad when you do look at it on the year-over-year moving average basis, because odd things happens in months. But we were kind of in the 6.0%-6.5% range for growth in retail sales year over year, now we're kind of in the 4.0%-4.5% range. The peak came last October when gasoline prices were really high, and as they came back down a little bit, now we're down in the 4.0%-4.5% range. But it is more than gasoline. I will be honest with that, but certainly falling prices in general probably explain about at least half of that decline from 6.5% to 4.5%.

Stipp: So [besides] gasoline, there were some other areas that were down big, and we have some explanations for some of those. Let's walk through some of them; you mentioned gasoline. For home and garden, it's the summertime and folks should be out in their yards, but it didn't perform well.

Johnson: No, I think it was down 1.8% or something like that, which is horrible, and it is a volatile series. But what happened with that number is that with the drought throughout the country, the stock of merchandise available to sale is almost nothing, and people don't want to put in stuff figuring it's going to die because of the heat anyway. So that's really hurt and people. Maybe hoses are up a little bit, but you certainly need lawn-mowing equipment and weeding stuff. The weeds can't even survive in this drought. So, that's a relatively big category; it just looked abysmal this last month.

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