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The Consumer Will Come Back in the Second Half

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. The government reported retail sales for June on Wednesday and the numbers were down 0.5% for the month of June. This wasn't necessarily unexpected to Morningstar's Bob Johnson, our Associate Director of Economic Analysis. He's here to explain a little bit about what he had been expecting for the report and what he's seeing in the back half of the year for consumer spending.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So the headline number was a little bit lower than some people had forecasted, but you wrote last week that you weren't expecting great things out of this number. What was your take on the headline number and how did that meet with your expectations?

Johnson: It was pretty much inline with what I was thinking and the key thing in the retail sales number to keep in mind this time. This is the most comprehensive government report. We talked a little bit about last week about the individual stores. This is the one. It's got everything from gasoline, to restaurants, to retail stores in there.

So this is the most comprehensive report. It's very hard to call and you got to be very careful about analyzing the data in that report because there is so much in it.

Stipp: One of the things in the report as well is its capturing prices, but so if prices in some areas go down, then that's going to affect it. So it's not really adjusted for inflation in other words?

Johnson: That's correct. At the end of the month when we see the personal consumption numbers, which are based a lot on these numbers those will be inflation adjusted. These numbers are just kind of raw numbers.

Stipp: So let's take into it a little bit and talk about some of things that were up, some of the things that actually showed some positive results when you start to dig in and look in the different categories in there. What were some of the things you saw?

Johnson: Sure. I think there were a lot more categories up than down. I mean, the autos is a big weight on this. If you take the autos out, we were only down a tenth or so, and if you take gasoline out of there, you're actually, in addition to the autos, we're up a tenth on the overall set of numbers.

Stipp: And gasoline a volatile one, where the prices can change a lot and really have an effect here?

Johnson: Right. They're going to have a big effect on the reported number, but when we get to the end of the month and get the full consumer spending report those are adjusted for inflation.

Stipp: So in some of categories, what did you see that was on the positive side?

Johnson: Sure. I think you saw a lot of categories – electronics looked very good again and it's one that we've heard about last week. In the first quarter, it was a good strong category. This time, I think it was also a strong category. You saw personal healthcare spending looked pretty good in the quarter. Department stores were another real strength, up over a percent month-to-month. That's like a 12% increase, if you annualize the number.

So it's good to see those types of stores doing well. Apparel did well, just kind of sometimes a discretionary item. May be the warm weather helped a little bit, but certainly that was another category that was up.

Stipp: You checked in with some of our retail analysts for some additional color on some of these categories, and for electronics, it wasn't necessarily the big ticket purchases of TVs and stereos and things like that, but there was a little bit some texture underneath there?

Johnson: It's very interesting. TV sales have not been quite as strong over the summer here and have actually been a little bit weak. So they were little surprised. I told them overall electronics number, but we dug into a little bit and decided it was things like computers, the iPads going out and a lot of the smartphones that fall in this electronics category. They were responsible for driving a lot of the sales worth, which was good and actually accelerated from May to June.

Stipp: So some of those new products from Apple certainly got people excited about certain segments within electronics, probable spread some sales there. And there's also some interesting differentiation on restaurants. So some restaurants did better than others and I think restaurants give you a sense of where consumers are feeling. It's kind of a discretionary expense. What did you see on restaurants?

Johnson: Overall, the category is up two-tenths of a percent month-to-month, and so that only annualizes about 2.5%. So not a great number, and our analysts tells they are seeing a real dichotomy, some of it, what we call, casual restaurants, the T.G.I. Friday's and whatever, that people might think of taking their families to as kind of a treat, are actually beginning to do a little bit better.

On the other hand, the quick-service restaurants, real fast food, burger type of joint, those sales are still suffering and the reason is that those are tied a little bit closer to employment, because people tend to dash out of those in between their lunch-hour period or off from the construction site or whatever into a quick-service restaurant and that business is still really quite weak.

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Stipp: So certainly quite tied to the employment market, which is still slow to recover. So that probably explains a lot of that. Another thing that you had mentioned that you are sort of taking out when you are looking at these numbers was auto. So what's going on with the auto sales and why have they been a drag on the overall numbers?

Johnson: I think we had a very good first quarter for autos and I think we had a lot of really big promotions and financings in the first quarter. And recall, when Toyota had all their problems, they pulled all the stops for advertising and financing, and frankly those numbers have been a little bit hard to match in the second quarter.

On top of it, as we alluded to in our piece last week, was that the consumers are willing to step up for a little small bargain or a luxury or whatever, but the really big ticket car, they really haven't gone wild yet. And clearly, we had a decent March, and now we're kind of backed off and we're being cautious. It's a big ticket item and until they feel a little bit more confident, those auto sales are going to be a little bit of a drag.

Stipp: Okay. So I'm going to ask you to pull out your crystal ball here a little bit and talk about what you are seeing for the rest of the year on the consumer spending front. So it seems like it's been a little rocky over the last few months and a little bit harder to get a sense of what the actual trend is, but what you are looking at to get a sense of where consumers might be putting their money in the back half of the year?

Johnson: Yeah. I think that overall, I'm looking for consumer spending in the first half year to be up about 3% and I think that's probably just about what we're going to get in the second half and maybe they shot at just a little bit better than that. And I think consensus is that we've peaked out and it's going to get worse in the second half.

And let me explain some of my reasons why we think we're going to – it could be a little bit better in the second half. The savings rate has gone up in the first half of the year. Consumers have put a little bit more aside and I think part of it is -- maybe whether it's a fear from the European situation being splashed on the headlines, whether it's the market being down or whether it's the Gulf oil situation, people clearly had more money to spend, but didn't spend it, and I think they could choose to spend that in another quarter.

Stipp: Especially if they have some saved up, if they've banked a little bit then they might feel like they can do some of those small luxuries and spend a little more.

Johnson: Especially as they feel more confident. Now we've had a pretty good start to the quarter in terms of the stock market and that certainly could help them feel a little bit about letting their purse strings go up again. It seemed to be a little bit more correlated than I would have thought.

Stipp: Yeah certainly earnings season has started off pretty well. There is still a lot – of course, we've just started earnings season, but if the markets sort of holds up if earnings look a little bit better – I mean Intel's earnings, for example, they saw some nice improvement across the board from business to consumer. So I think maybe that will certainly help people feel a little bit more confident?

Johnson: I think certainly the first, as you warn, we don't oversee the back half, but certainly the first week of earnings season looks pretty good. I mean Alcoa kicked the ball off with some pretty good numbers and seen some little bit better demand than they had across the world.

Then we saw the Intel numbers, as you mentioned, not only did they report a very good and above expectation quarter, but they also forecasted the second half was going to be strong as well and that we were on the start of a major PC upgrade cycle. So that may be we won't be all wedded to the consumer, but maybe the businesses will do a little bit better too and kick in some help to improving economy in the second half.

Stipp: Certainly would be a nice trend to see kick off. So thanks for joining me Bob and for your context on the numbers...

Johnson: Great to be here.

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