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Where the Consumer Is Spending

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We got a couple of pieces of consumer data this week, some preview data ahead of next week's government retail sales report.

Here with me to pick apart some of those reports and tell us what they mean for the economy is Morningstar's Bob Johnson. He is associate director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So first question for you. We've got a couple of smaller reports ahead of the government retail sales report, and you've dug into those this week. What were those reports and what did they tell you?

Johnson: Sure. A lot of the individual stores report their data for the previous month on this Thursday and it is a compilation of various stores. And there is two major reports that go through and do this. The International Council of Shopping Centers is one organization that does it, and there is another group called Retail Metrics goes through and analyzes a similar set of stores, but some are different.

Stipp: So these reports are looking at same-store sales. So these are stores that have been open for more than a year, so they are not adding in any new stores in there?

Johnson: Correct.

Stipp: Okay. Where did the numbers come in on those reports and how were they compared to what people were expecting?

Johnson: Sure. They were relatively consistent. The Retail Metrics number was about 3.2% same-store sales growth, and the Shopping Centers Council number was about 3%. And the Shopping Centers had said 3% to 4%, so it's at the low end of that range, and 3.5% was the expectation on the Retail Metrics number, and that came in at 3.2%.

Stipp: Okay. And you spent some time sort of digging in there and seeing where the consumer was actually spending in these reports. What did you find about where you were seeing some growth and what still was looking lackluster?

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Johnson: In these reports, there were a few things that were visible. And then I have got some government reports I want to talk about too that show where the spending has been this recovery. In terms of these reports, it's clear the luxury end of the market is doing better. Maybe it was the better stock market or whatever, but there has been consistent growth, and you see that companies like Nordstrom, in particular, where we had a great comparable store sales number this morning, that the luxury end has come back faster than anything else.

The discounters are doing okay, but they have got some harder comps, and their growth has probably slowed up a little bit. In fact, department stores for a change actually grew better this month than discount stores. So I think that's kind of an interesting phenomenon as well.

Stipp: And what were you seeing on the auto side, because autos again are another part of the consumer spending overall, and you had seen some interesting trends there?

Johnson: Yes. Moving away from our monthly retail sales comp store report, now looking back at government data, I'd like to focus on what's happened in this recovery in terms of the consumer. The consumer is now back to spending the same as he was before, and a lot of people are going like, Bob, how can that be? But it really is the case. But others have not improved.

Now you asked me about autos, and that's one that contributed a little bit to this recovery, but in terms of the consumer side of the house, autos have only recovered about 10% of what we lost in this big decline in auto sales.

Stipp: On the consumer side?

Johnson: On the consumer side. Now we've had a bigger boom, when you look at fleets – you know, your Avis, Hertz, and all those kind of folks. Sales to small business, we've talked about pickup sales, the small business is improving. And just general sales to corporations that are in the investment accounts, not in the consumption accounts, are all quite a bit better, but the consumer buying for his own personal use is barely off the bottom.

Stipp: So if the consumer isn't feeling comfortable enough to go out and buy a car yet, maybe still feeling a little bit shaky about the economy and the job market, where is the consumer spending money? Where have you seen some good growth?

Johnson: Well, it's really interesting. There is one category that jumped out, and I actually had to look up what was in it to figure out what it was, and it was called recreational goods and vehicles, and that was the number one leading category. It accounted for about a third of the recovery, between a third and a half of the recovery in the consumer spending this cycle. And that's things like consumer electronics is in that category, books is in that category, sporting goods is in that category.

So kind of the small splurges in life are in this category, and it's done stunningly well. And it makes up the, like I say, the lion share of the improvement. Things like furniture are also doing better, but usually that'd be the leader coming out of recession. Autos is up a little, contributed some, but again just a little bit of what they normally do.

Stipp: So, it is positive, though, that a lot of these things could be considered discretionary. There are smaller purchases, but there maybe things that a consumer wouldn't have to buy, but they are feeling comfortable to start buying some of the smaller goods.

So I guess the next question for you then, based on some of the data that you've seen, and you said this data was about in line with expectations. What are some of the implications for the economy and what are some of the implications for the consumer based on what you are seeing in these spending patterns?

Johnson: Sure. I think, like you say, there is room for improvement in a lot of categories. We've got some initial bounce off the bottom on a couple, and we've got a lot of non-participators, and maybe those are slowly starting to turn. My data only goes back to March in terms of the broad categories, and so one of the things that was really weak is hotels and airline sales. They've only recovered 5% to 10% of what they lost this recession.

But now those numbers have started to get better. We hear about airline bookings doing much better, hotels finally turning the corner. So there is a category where we haven't really seen much move, where we've still got a lot of room on the upside. So people are moving up.

Before it was like, I'll buy an iPod or maybe I'll buy some small item and increase my food budget, which are two things that have recovered very well, and now kind of moving in and starting to say, I am going to spend on that vacation, and I think we are starting to see – now they are still not buying the car or the house, but we are starting to see the progression.

Stipp: So it does seem to indicate then that maybe we are not close to the end of – there wasn't a huge boom in consumer spending that now it's all over like. We are starting to see some progress along that line. Because I think the March numbers looked just so great for consumer spending and then April didn't look as good, and I think that's when a lot of people start to really get concerned that although consumers had a spurt of spending, now there are worries out there in the economy again and the spending is done, but your data isn't suggesting that?

Johnson: No. In fact, the data is really pretty clear on that. March was some type of outlier. I mean we had been trending about 3% growth in retail sales for some time, and March was just a stunner. I mean it was 9%. I mean it was a perfect storm of great weather, pent-up demand and cabin fever, calendar days, in the way the retailers count their sales in which month, and where the holidays fell all combined to make that a really stunningly good number, up 9%, and that just doesn't happen.

And now, we've actually had three months of improvement, where May was better than April and June was better than May, and we've now had 10 consecutive months of retail sales, same-store sales being up, which I think is a great trend, and people kind of get lost and say, "Well, gee, it's not as great as March. We are going back into the abyss." And I look at the data and say, "No, March was incredibly good and we collapsed after it. Now we had a nice improvement again."

Stipp: So, you really have to say, it's a squiggly line, but the trend is in the right direction?

Johnson: That's right. And looking ahead to July, I think we are going to have another 3% to 4% growth month in consumer spending, kind of extending that trend.

Stipp: Sure. Well, Bob, thanks for your insights on the consumer.

Johnson: Thank you.

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