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Johnson: Happier Holidays in Store

Jason Stipp

Jason Stipp: I am Jason Stipp for Morningstar. We got some consumption data this week. Consumption growth of 0.3% in October.

What does this mean for the consumer's health and the upcoming holiday season? Here with me to offer some insights is Morningstar's Bob Johnson, director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So consumption data, this is different than the retail sales data. It's actually a little bit more encompassing. Can you explain exactly what this metric is looking at?

Johnson: Sure. Consumption data is the broadest measure we have of everything that the consumer spends their money on, including their housing, what they buy at a store, the food they buy, things when they go out to eat, when they get their haircut. It is the broadest measure. It is 70% or so of the gross domestic product. Everything we produce is in this consumption measure.

The retail sales report is – there is different variance of it, some of them are literally average what the big stores see in their stores and how that's grown, and then we have a government report on retail sales, and again that's basically what you sell in the stores, but that also includes autos in there, and it also includes foodservice and some other things, so it's a little bit broader, but still it's not the big Kahuna, and that's why this one take so long to compile. The number we got today is for October.

Stipp: And so  obviously, there is a lot of attention paid to the consumer, especially this time of the year. Can you give me a sense of the trend that we've been seeing then in this consumption data? Is that 0.3% number for October a good number, is it a continuation of a positive trend?

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Johnson: Well, the first quarter consumption grew 1.9% on an annualized basis. It grew 2.2% in the second quarter, so a little pick up, and then it was 2.8% for the third quarter, and so the trend is definitely there. Then we've got the single month of October, I am a little hesitant to hang my hat on one quarter or one month, but that was up over 3%.

Stipp: Annualized.

Johnson: Annualized. So again, that shows that the consumers are spending more and more each and every quarter, and it's really quite a positive trend.

Stipp: So it's interesting to dig in and look at what was spent on the retail side and then what was spent on services, because that is included in this number. What trends did you see underlying there?

Johnson: Services is still a little weak. Your haircuts, your airlines, the things that are services. The growth is still more muted than on the goods side. People are still buying their iPods and a lot of goods, and really still being a little slow on the services side.

Now this time the number was held back by something a bit unusual on the services side; some of the utilities numbers because of a warm October were a little weak, and that may have held the numbers back as much as a tenth of a percent on a monthly basis.

Stipp: But potentially people who are paying less for utilities, they might have a little bit more to spend…

Johnson: -- more to spend the following month, right.

Stipp: So that could give a little bit of a boost. We also get income data with this report. Can you give us a little bit of a sense of the trend that we're seeing in that data, and is it a positive trend?

Johnson: This month there was a pretty good match between savings and spending growth. Each grew about three-tenths of a percent, and if you kind of put a few more decimals on it, income actually did a little bit better than what people spent. So, people aren't digging into their savings to kind of get this extra fill-up of spending here. They are actually having the real income to go out and do it, which came from the employment data and hours worked that we saw in October. So they've got more money to spend, and they're spending it. They are not being silly; they are not taking half their savings away. So it's kind of a nice in-the-middle trend. Now the income number has been a little bit more volatile than the consumption data, which has kind of been rock steady improvement, but certainly I like the October number.

Stipp: So Bob, looking at this data and then looking ahead to the holiday shopping season, what does this portend for how investors might be spending over the next month or so?

Johnson: Sure, I like what the numbers have been saying, and I've got a pretty positive outlook. I am looking at over the holiday season kind of 3% to 3.5% growth in retail sales. I am bullish: Initial unemployment claims have come in nicely over the last few weeks, just couldn't have happened at a better time to give consumers a little bit more confidence. We had one of the best numbers we've had in a couple years on initial claims this week. So that's a fantastic data point. We've got a stock market that's generally been trending up, and that's one of the best indicators of how much people will spend over the holidays believe it or not.

Stipp: It's that wealth effect.

Johnson: The wealth effect, exactly. We've seen – I don't look at the Michigan sentiment indicators and those type of things, but I look at things like car sales, which are up from in June 11.1 million units seasonally adjusted, all the way up to almost 12.3 million in the most recent month that we have data on. So there is a big ticket item, and it's really an indicator of confidence, so I am feeling good about that car number indicating overall consumer willingness to spend. And I mentioned the incomes are looking good.

Stipp: So Bob, if we are looking at around 3%, to what extent do the promotions factor in there, because it still seems like the consumer is out there looking for a deal, and will they open their wallet if they can't get that rock bottom price?

Johnson: I think, they are going to spend very carefully. I mean, maybe they will pay a full price maybe for an iPod or an iPad or something like that, so there is a few times they will pay up for, but in general, if it's not on sale they are not buying.

Stipp: So we may see some traffic trends increase here, but we probably won't see spending necessarily increase to the same extent.

Johnson: Yeah. And then let me be clear, I am saying that same store sales are looking like about 3% over the holidays. I think traffic could be more like 5% to 7% up, so be prepared for crowds.

Stipp: Sure, but maybe they won't have quite as many bags as they had in the past.

Johnson: Yes. That's right.

Stipp: Alright, Bob. Thanks for joining me, and thanks for your insights on the consumption data as well as the holiday shopping season.

Johnson: Great.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.