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By Jason Stipp and Robert Johnson, CFA | 08-14-2013 12:00 PM

Consumer Still Hemmed In

Consumer data have risen off recent lows but are still closer to the bottom than the top of their recent ranges and facing some headwinds, reports Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government's July retail sales report this week, and it was better than a lot of economists were expecting. But is the consumer ready to break out on the upside?

Here to offer his take is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Good to be here.

Stipp: Before we talk about some of the consumer data we got, you just want to remind everyone how important it is to keep your eye on the consumer. We get a lot of data, but the consumer is really the one you want to key in on.

Johnson: Right. If you can only focus on one thing, it really does need to be the consumer. The consumer is 70% of the GDP report. It's really what drives the economy. A lot of people say, what about China or Europe? Well, Europe is about 3% of our GDP and China is 1%--tiny factors compared to what the consumer does.

Stipp: Even manufacturing, we're not going to see manufacturing open up new factories or have overtime workers unless they're seeing the consumer demand for those products.

Johnson: Absolutely. This business of everybody tracking all the manufacturing data is really not very helpful, because they're not going to build stuff unless it's being demanded by somebody.

Stipp: We can keep our eye on the consumer with some recent data that we got. The retail sales report was the most recent. But let's start with the GDP consumption component and where that came in. What is it telling you right now about where we are compared to the recent past and the recent trends.

Johnson: Consumption includes both goods and services, but the consumption number in the latest quarter was running at about a 1.7% annualized rate. Now, that's been in a range of 1.5% to 2.9%, so you can see we're not on the bottom anymore as we had been for a few months. Now we've come back again, but we're still at the low end of the range at 1.7%. We certainly aren't creating new ground, or doing absolutely wonderfully. In fact, the consumption number was a little slower in the second quarter than it was in the first.

Stipp: So a lot closer to the bottom than we are to the top of that range on that metric.

Johnson: Exactly.

Stipp: Let's look at the retail sales report. It was a 0.4% increase for the month [excluding autos and gasoline]. When you look at that data, what is it telling you and where are we in the retail sales report range?

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