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Headwinds and Tailwinds for Consumer Spending

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. We got the retail sales report from the government this week. Retail sales for January were up an anemic 0.1%. So what's the true health of the consumer? Joining us to offer his insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: 0.1% month-to-month number doesn't seem very strong, but it was a little bit better than some people expected. What was your take on that number?

Johnson: I think the number was just a little bit below what I have been thinking at 0.1% month over month growth, but on a year-over-year basis, we're still in very good shape on that number. In fact the growth rate there is accelerating. In the last few months, it's been 3.7%, 3.8% and now 4.2%, looking at year-over-year average data. So, I think you've got to be careful not to take one number out of context.

We had two months in a row, November and December when retail sales were up over 1%; it's very hard to string together three positive monthly growth rates in retail sales. We've tended to have two up and one down, two up and one down. It's very hard to even string together three of them. So, this did not come as a surprise.

Stipp: When you look at the underlying sectors, some things that had been up before were down, and some things that had been down before were up. But it's not like everything was down.

Johnson: .No. There were categories that did well. Non-store retailers, the Amazons of the world, did well. Groceries did well. Apparel did not do so well. And furniture, which had been on a tear because of better housing starts, took a little pause. [Furniture] had been at 1% [growth] a period, but it was now minus 0.2% [in January]. And electronics were up, and that's been on a yo-yo recently, too. So, it's not like the whole world collapsed or anything happened in retail. I think we had two very good months, and we backed off a little bit.

Stipp: And there were expectations, as you said, that January wasn't going to be a great month. There were some headwinds. There were also some tailwinds that maybe people weren't quite expecting, but let's start with the headwinds first.

The one I think that worried people the most was this payroll tax holiday that expired. So people are paying more payroll taxes starting in January because of that expiration. And there were concerns that this was really going to affect the retail sales report. Do you think that it affected it?

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Johnson: Probably on the margin, it did. One of the categories that had been doing well [before] that was flat [in January] was restaurants. And I said [restaurants] would be the mystery item in the report. And that number was out-and-out flat, and that's usually a decent indicator of [how] the consumer feels about their free spending [money] that they have.

So, I would expect the payroll tax to have an effect. It's a couple of percent. If the average family income is $50,000--that may be a little high--but if that's it, you take 2% of that and that's a $1,000 hit. So it does begin to affect some of the numbers, but there are things that can offset that.

Stipp: Another thing that you mentioned was tax refunds are not coming out as quickly as maybe they have in past years, so that's less money in people's pockets in January. How much do you think that had an effect?

Johnson: That's a big deal, and that actually may have been about in the same order of magnitude as the payroll tax cut [expiration], because the average refund is $400-$800, which is about in line with what the payroll tax effect is.

What happened this year is, because of the fiscal cliff issues being resolved so late, you couldn't even enter your tax return until, like, Jan. 30. So those people that used to file their returns the minute they got their W-2 on the 10th and maybe get their refunds by the 20th--that didn't happen this year.

Stipp: You also mentioned again that we had a couple good months, so this was somewhat of a correction in January… from those higher-than-expected months.

And then the last one, gasoline prices are on the rise right now, and that's going to take a little bit of spending power away.

Johnson: Yes, absolutely. We seem to be in a pattern where gasoline prices go down through December and then we have the spike up in January, and it happens every year. Although this year, the spike is, again, a pretty hefty size, as it was last year. And unfortunately, I think we'll get a little bit more of that, and we're going to have probably even a bigger impact on the February numbers when some of the bigger [gas-price] rises happen.

… The price of oil is going up because of geopolitical issues around the world and improvement in some of the emerging-market economies that had been weak. So people are guessing ahead of the game that oil demand will go up and have driven the price of oil up from the mid-$80s to the mid-$90s. And then you've always got the refiners who have their own problems and seem to have a wrench fall in one of their pipes every week, which seems to explain some of the rest of the problem.

Stipp: Let's talk about some of the tailwinds that some people perhaps weren't expecting that probably helped consumers a bit in January. The first is Social Security payments, the cost-of-living adjustments, put a little more money in seniors' pockets.

Johnson: We take with one hand and give back with the other. We had obviously the payroll tax taking away from people, but we also had the cost-of-living increase for [retired] people. That's a big deal to those people, and I think that helps every January.

Stipp: For lower wage earners, the minimum wage went up a little bit in some areas.

Johnson: In some states. We heard in the president's address the other day that he might try to do that across the United States, but there are already a large number of very populous states that raise the minimum wage every year, and that generally happens in January, and we got some again this year.

Stipp: The weather in January was also more favorable for merchandise for some retailers.

Johnson: Yes. [It was] almost like we shot ourselves in the foot 12 months in a row with the weather just never quite being right to help the data, and this time it actually did. In the Midwest and Northeast, we had a number of storms and cold snaps that got people buying boots and gloves again, which they didn't have to do for the last 12 months. And then we had things like Texas being unusually warm and had a couple of 80 degree days, which pushed people into the stores for spring merchandise. We saw it in the numbers: Department stores were one of the really strong categories growing over 1% in the month of January. And that group has been a train wreck for the last 12 months, because people didn't have to buy the seasonal goods as much as they used to, and now we had a month where [the weather was] more normal, and lo and behold, department stores did better.

Stipp: Lastly, because of the fiscal cliff, there was some acceleration of dividend payments and maybe some bonuses at the end of December to try to get ahead of that fiscal cliff uncertainty. That could have put some money in people's pockets in January.

Johnson: Absolutely. It may have actually landed in their other payroll accounts on the last day of December, but the money probably more likely got spent in January. The personal income report from the government suggested that there were a lot of accelerated bonuses and dividend payments that benefited people right at the very end.

Stipp: So help me out here, Bob. We some headwinds, we have some tailwinds for consumers in January. Can you dig into the numbers a little bit and tell me what you think the real health of the consumer is?

Johnson: I think the consumer remains remarkably strong and resilient. I think the consumer went through the last two months of the year with some just unbelievably good income data between more employment, higher wages, more hours, and low inflation that really put him back in the driver's seat again. And now you've got the two biggest assets, the stock market and homes, beginning to do dramatically better, and making consumers feel better about their position in life and actually being able to borrow against their home or even get their home refinanced at a much lower rate, which they couldn't do a year ago.

So I think the news for the consumer is generally very good, and I think we've seen some early signs that the payroll tax wasn't a complete disaster. For example, we didn't see retail sales go down 2% because the payroll tax went up, and one could have posited that maybe that could have been an outcome, and we didn't get anywhere near that number. And I would probably even suggest that the lower number was less due to the payroll tax and more due to how well we did in November and December in a lot of those categories.

Stipp: So when you take a step back, you look at a certain set of data to help smooth out some of the volatility that we see. Where are we with … that longer-term data set that you look at?

Johnson: The year-over-year data I like to look at [indicates] about 4% year-over-year growth in retail sales, and we did a little better than that in January. I imagine we're not going to do quite as well in February. But I think that we're on target with this 4%. We've been on that track for about two and a half years now. Without a major spike in food or oil or a new war or something like that, I think we're going to keep driving down that same path of about 4% retail sales growth.

By the way, this is just one report, the government report, and this one is comprehensive. It rolls a bunch of data into it. It lacks inflation adjustments, so the real number may actually end up looking a little bit better than this number.

The other thing that goes on with this set of data is that it is comprehensive. The shopping center data for the month of January, they're raving about how great a month it was, obviously the weather helped department stores in particular. So it was a bunch of funky little categories that probably hurt the numbers. There are some things that may get seasonally adjusted out that were very unusual. Groceries was one of the best categories in the data, but food sales in general were flat, and that's very hard to explain. Groceries [account for] 90% of the category. It means that 10% of the other items--which I don't know what they are, but it includes liquor--almost went down 50% in the month, and I don't think that happened. I think we're going to see some revisions there.

Stipp: You mentioned the shopping center data. There is some more timely data that you get week to week on shopping centers. Anything in there that would concern you about less spending because of some of those headwinds we talked about earlier?

Johnson: We've been stuck in a 2.5% to 4% range on the weekly data, and because it's weekly, we usually end up with something closer to the 4% for the whole month, but the number goes between 2.5% and 4%, and it has been locked in that range.

We've had three weeks in a row now where we've been under 3%, and in fact we touched 2% in the latest week. So there seems to be some back-off in the weekly number, but unfortunately the interpretation gets extremely difficult because last week was the blizzard. It was almost a Sandy-like event for major portions of the country where people couldn't go shopping for two, three, four days, and that that impacted the number a little bit, I think. As long as we stay over that 2% year-over-year [growth rate], I think we're fine. But I am watching that set of data to make sure the payroll stuff isn't having a bigger effect than I may have thought.

Stipp: We'll depend on you to help us keep track of all the retail data. Thanks for joining me today with these insights.

Johnson: Nice to be here.

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

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