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Consumers Haven't Given Up the Ghost

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar.

Another day, another economic indicator: Some up, some down. But where should we look to get a sense of the real underlying health of the economy.

Morningstar's Bob Johnson has some clues for us, and he is joining me today.

Thanks for being here, Bob.

Bob Johnson: Thanks for having me.

Stipp: So, we are getting a lot of different indicators; the market sometimes responding to them, one way or the other. It feels a little seasick sometimes out there in the market.

But I want to get a sense of what you're specifically looking at. So, obviously you look at all of them, but you're honing in on certain economic indicators right now.

Can you give me a sense of what those things are?

Johnson: Sure. I watch a lot of what the consumer is doing, and there I've got to be very careful when I look at the consumer numbers. But I'm primarily watching the consumer, his incomes, his employment. Those are the things that are going to drive the economy going forward. Then there are things that I'm not looking at.

Stipp: So, before we get to those, let's talk a little bit about the consumer, because there's been a lot of events, some anomalies really, that have toyed with and messed with the consumer data that you have to look past or at least account for. And I think one of the big ones is auto. We've seen a lot of anomalies with auto sales. Can you talk about how you're adjusting for that in your estimates and what you're looking at in consumer?

Johnson: The biggest way I do that is I look at the International Council of Shopping Centers numbers, both weekly and monthly. Those numbers are what you buy at the store, and they exclude autos and they exclude restaurant sales. So, they are kind of pure "what are you actually buying in the store" type of numbers. And those numbers have been very consistent. We've been stuck in a rut--whether good or bad, at kind of 2.5% to 3.5% year-over-year growth, for almost a year now. Those numbers have remained remarkably stable, and so I'm very, very positive on those.

Stipp: I know typically you can look at auto sales as a gauge for how good the consumer is feeling, because that's a bigger ticket purchase. But we've seen some strange things happening with the auto sales and the auto prices. Can you talk about what's going on there?

Johnson: Sure. We went several months where we were running in an annual rate of well over 13 million units. Then we dipped back under 12 in the latest month, because of supply issues from Japan and also even some parts in the U.S. manufacturers, so there really wasn't a lot of supply, and on top of it, we had a lot of price increases and lack of incentives, so consumers voted with their feet, and they didn't buy new cars.

Stipp: But when you're looking at the shopping center data that would indicate that consumers aren't turning away from spending altogether. They're just turning away right now from autos, because shortage of supply and higher prices.

Johnson: That's right, and so we saw consumption numbers were down 0.1% in the most recent month, but almost all of that decline in spending was due to autos. So, you've got to be careful which consumer numbers you look at.

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Stipp: I know that you're also looking at the inflation data, especially on commodities. What's been the trend there, because we saw it heat up and now it seems like it's cooled off a little bit?

Johnson: Right. Inflation is extremely important, because it determines how far a consumer's dollar goes and how confident he is, and it also mechanically affects how the numbers are calculated, and so, if we have the same type of basic result and no inflation this month, the numbers will look better the following month. So anyway, that's one of the factors that's going on.

But inflation is being helped along right now by gasoline prices. In May, we were at something like $3.98 a gallon. Now we've fallen all the way back to $3.57. That's a huge decline in a very short period of time, and so I think that's going to begin helping the CPI numbers and that will begin to roll in in the months ahead.

Stipp: Are you seeing any evidence that consumers are able to spend a little bit more on other things, because they're not spending quite as much at the gas pump? Are you seeing any data on that yet?

Johnson: Well, it's a little bit early to tell, but I mean they certainly haven't declined and certainly we are seeing some signs of improvement in certain categories, but it's a little bit too early to tell yet. We have to wait in a few months to see what's happening.

Now, we did see in the latest week that shopping did pick up. I look at the data both monthly and weekly, and the weekly data really picked up last month. We had our best month since January of this year, which is a Christmas-related month. We had a great number the most recent week when gas prices came down and temperatures went up.

Stipp: So, focus on the consumer and right now look at the shopping center data because there are some irregularities with some of the auto sales data; it's important to adjust for that.

What about the employment picture? So next week we are going to get unemployment [data]. How important is that figure to you? What do you need to see and how you are going to put that into your forecast?

Johnson: Well, again, I don't need necessarily employment to go up a lot, but I need some combination of employment, hours worked, and wages, and I need those three together to produce a good number, and I don't need all of them necessarily going up. So, I look at the whole picture, so that's the number one consideration.

Number two is, next week's number is going to be a little bit hard to interpret. We will talk more about that next week, but there are some seasonal factors that make the number a little bit tough in terms of comparisons. The measure came before Toyota really stepped up their production again in some of their U.S. plants, so that's not going to be in the numbers yet. So, I don't know which way the number is going to go for sure, but if it were a disappointing number, this is an odd month to pick to look at. In general I'm looking at employment.

Stipp: You need to see that trend happening over the next few months?

Johnson: Exactly.

Stipp: So, I know that there are also a lot of other data people are really focusing in on, and we are going to get some PMI data coming up here soon that I know the market is going to be looking at, but manufacturing isn't one of the areas where you are intently focused right now. Why is that?

Johnson: Manufacturing just amplifies what's going on with the consumer. It doesn't have a life of its own. Manufacturers aren't going to produce 100,000 new cars because they think the consumer might buy more next month. When the orders are there and the book of business is there, they will make the cars. Oftentimes the confusion is because manufacturing will dramatically amplify what's going on in the consumer side, because it swings so violently because of inventory factors. So, again, you've got to look at cause and effect, and that's why I look at the consumer. This month's manufacturing numbers, some of them are beginning to look a little bit better. The PMI is a little bit of a tough call, but I wouldn't worry even if that number went below 50 this month. That wouldn't scare me.

Stipp: OK. And what about housing? We got some recent housing data that actually looked a little bit better. Is housing one of areas where you are focusing right now?

Johnson: It's not one where I'm focusing. I'm glad to see the numbers; I am glad that we aren't eroding in prices anymore. The Case-Shiller number was up in the most recent month. The Federal Housing Administration number was up in the most recent month. So we've finally broken the back of 12 or 13 months of consecutive decline that we had seen, and now it looks like we are going the other way again. So, that's good news, and pending home sales were also up this morning a lot more than people were looking for. So, maybe housing isn't maybe as dead as some people thought, but again it's not a big factor in my forecast.

Stipp: So, the construction of housing isn't a huge part of the economy, but what about the sentiment about housing, and people's feeling of how wealthy they are based on how much their home is worth? How much does that factor in, because there is a consumer angle there, right?

Johnson: Again the chain-store sales are like a daily indicator of consumer confidence. Cars are intermediate term, but right now I can't read it because of the Toyota situation.

Then as we look for really long-term confidence, it's housing. So, I'd like to see the housing market get better, because it really indicates consumers' longer-term confidence. So, I'm hopeful there, and again so many of the things we've talked about are kind of short-term-oriented right now, but the longer-term picture is, as inflation dies down a little bit, the commodity bubble ends, and then we start to see housing creep its way back up over the six to 12 months and maybe next year turns out to be a really good year for housing--that drives the economy longer term, and that's what I have got my eyes on.

Stipp: All right, Bob. Well, thanks for helping us tune out some of that noise and focus on what's really important right now and for joining me today.

Johnson: Thank you.

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