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Consumer Is Off the Mat

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. March retail sales report was released on Wednesday, and it surprised a lot of market watchers with a 1.6% increase. Is the consumer finally off the mat? Here with me to give his take is Morningstar's Bob Johnson. He is the associate director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Nice to be here.

Stipp: So, this report did look pretty good. It beat a lot of analysts' expectations; 1.6% seems like a good number. How good is it? How good is this report?

Johnson: I think it was a very good number. I think it was above expectations that were out there, and it's a very broad measure of consumer spending. It's one that I've had trouble forecasting, because so many things go into it. It's $4 trillion of our $14 trillion economy is reported on in this report--everything from gasoline sales, to restaurant sales, to things you buy in the store.

It's a pretty comprehensive number, and to see it up that big--that's 1.6% month-over-month. That's not annualized. If you look at the number year-over-year, what we did, we're up 7.6% with almost no inflation. Other years we've had maybe as much growth, but maybe with 4%-5% inflation; this time it's 1%-2%.

Stipp: Really, when you're looking at in perspective, it seems like a very good increase. So, I guess the second question for you, then. Is this a fluke? Is this a one-time thing? We saw some things in the past where maybe consumers were at home because of the weather. Is this just a brief bounce back for that?

Johnson: Well, I think this was a pretty stunning number. It was good. I think the April number will probably end up being relatively flat. There's a couple of special factors there. Easter slid one month versus the other. The weather was unusually warm right at the end of March, which really boosted clothing sales, for example. That certainly helped the numbers, but the general trend has been so positive, and I really did like this report.

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Stipp: What has the trend been, then, over the last few months?

Johnson: Sure. This is the fifth increase out of the last six months. Some people would say, "Oh, well this just happened." People thought Christmas was going to be a disaster. Everybody thought we were going to have a down Christmas. It ended up being up; depending on which measure you used, up 3%-5%.

It was like, "Well, maybe it was a special thing," or whatever, and then this number was better, "Well, it was the weather," or whatever.

But if you look at it, we are well off the mat. The consumer has done a lot better.

Stipp: If we look into this report, you mentioned before that there were a lot of broad-based gains. Autos actually were a pretty big component of the increase that what we saw. Is that good news or bad news? How do you view autos in the context of the whole report?

Johnson: Sure. If we strip the autos out, we were still up 0.6%, which is very consistent with the 7% year-over-year number I gave you. It's very consistent. The autos were strong. There were a lot of incentives on, so that moved the number up.

But one of the side effects, in the very short run, with autos is that if people are out shopping for cars, doing their budgets, cutting back just a little bit so they can afford that car, retail sales in one particular month tend to suffer just a little short-run.

Stipp: Just because they're holding some money back for that big-ticket purchase. Because they're buying autos, though, could it be, longer term, more money in more workers' pockets because they're making these big-ticket items with all these components?

Johnson: Yeah. We talk about it all the time. The autos obviously employ people that are pretty high wages, pretty long hours per week. Over time, as more auto workers get called back, that means more income, that means more retail spending, that means more production. Then we get onto this virtuous cycle, and it's virtually impossible to stop.

Stipp: So speaking of that, Bob, is this sustainable? What's going to keep it sustainable if it is?

Johnson: Sure. We're up five out of the last six months. That's at a time when unemployment has been relatively steady. It hasn't gotten much better. We really haven't had very many new jobs, whatsoever. We're basically flattened on the jobs front.

Now, I think we're getting to the part of the cycle where we are going to add jobs and meaningful jobs, 100,000-, 200,000-, 300,000-a-month type of jobs. So, we could layer that on top of the improvement that we already have. That's where the next leg is going to come from.

Before, it's been the people that had their jobs spending more and feeling more confident. Now, we're actually going to have more people with more jobs, maybe a slightly higher wage, and maybe more hours worked. All of those things will put more spending money in the consumer's pocket.

So far, almost all of the additional spending has been because they've cut back a little bit on their savings. Everybody panicked and saved a lot more money when the recession hit. Now, some of that is starting to come out, slowly but surely, and that's what's moved us so far. Now, we need the real incomes and the real employment.

Stipp: Well, certainly something to be optimistic about in the future. Thanks for joining me, Bob.

Johnson: Great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.