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By Jason Stipp and Robert Johnson, CFA | 03-27-2013 12:00 PM

Yellow Flags for Consumer Spending

Recent lackluster spending data suggest the consumer is not as strong as some may believe, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. After a better-than-expected February retail sales report, enthusiasm for consumer spending, and thus the economy, seems to be on the rise. But Bob Johnson, our director of economic analysis, sees some yellow flags for consumer spending. He is here with us to explain.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, there is some exuberance you're sensing about consumer spending, the economy in general, and you're saying, "not so fast." How exuberant do you think people are getting about the economy, and what's driving it?

Johnson: Let me pin that down. It was interesting. I was on a panel this weekend, and I am usually the most bullish guy on a panel, or relatively bullish, and I was actually the least bullish of all the panelists this time around.

To put some numbers behind it, in general, the consensus was about 2%, maybe even 1.9%, GDP growth for 2013. That number is now approaching 2.5% on a consensus basis. And again, my estimate was 2%-2.5%, which it has been for some time, and I'm going to stick with that, and I think the best shot is probably at the middle of that. But the consensus numbers have come up.

The numbers for the first quarter have gotten particularly ebullient. There were some forecasts I heard over the weekend … were as high as 3% for the first quarter. I think the consensus there is also right at that 2.5% mark. Again, I think probably something 2%-2.5% even for the quarter works, but those numbers that are 3% are probably a little optimist.

Stipp: So for the full year, you're coming in at or a little below consensus. There are certainly other [economists] who are on the other side of that [consensus]. Why do you think that is? Why do you think there are some that are even more bullish in thinking that we'll do better than that 2.5%? What's behind it? You're saying maybe the February retail sales report started some of this. Why is that?

Johnson: I've been relatively consistently bullish on the economy, and I think there are lot of, what I'll call, Jonny-come-latelies that have looked at some of the data lately and gotten more bullish than maybe they should. And I think the retail sales report for February, the government one, was really a number that woke everybody up a little bit. We showed 1.1% retail sales growth in one month, which annualizes to 12%, and we also had decent auto sales.

People thought, gee, that's a huge number in February. And this was with the payroll tax going on and the tax refund [delay], then high gasoline prices, [they thought,] boy, the consumer must really be in great shape if he's spending all that money, because that's a number we hadn't seen for a while.

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