US Videos

Something Is Holding Consumers Back

Jason Stipp
Robert Johnson, CFA

Jason Stipp: I'm Jason Stipp for Morningstar. With lower gas prices, Wall Street hitting new highs, and consumer incomes and employment looking a little better, why are retailers so glum about the holiday shopping season?

Here to talk about some of the underlying drivers in the U.S. economy right now is Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: You've been watching the data for a little while, and you've raised a few yellow flags, especially about the consumer data. What has the trend been in the consumer data?

Johnson: It's been soft, and the most recent data point we've got is the consumption report, which is the most comprehensive. It includes cars, … housing; it rolls it all up into one package. In the most recent month that we have, which is September, we were only up on an inflation-adjusted basis 0.1% in terms of consumption.

And the retail sales reports have been nothing to write home about recently, either. My weekly shopping center data has showed 2% year-over-year growth, and is not really accelerating at all.

Stipp: Reading your weekly reports, you're not panicking yet, and in fact, there is somewhat of a puzzle going on right now, because some other things you look at would suggest that there are positive drivers that should be pushing consumer spending up a little bit. What are some of those?

Johnson: That's right. The numbers right now, the as-is concurrent numbers, are not looking good. But I'm a little puzzled why they aren't acting a little better. Gasoline prices are now at a two-and-a-half-year low, and they've obviously been volatile--maybe people don't spend that money [from short-term gas price declines]--but certainly we are at a very favorable part of the curve for gasoline inflation. And food inflation and generalized inflation is also very low. That certainly puts more money in consumers' pockets. There are a few other things that are probably weighing on the retail sales report, though.

Stipp: Let's talk about some of those background issues that may be keeping spending from being as high as it could be. One that you say might be causing some issues with the pocketbook is Obamacare, and some of the confusion and some of the issues that have come with the launch of that.

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Johnson: The Affordable Care Act came with a few puzzles, and I've always tried to stay out of it a little bit, thinking all the plusses and minuses will probably end up balancing out. Unfortunately, right now, we're at one of the parts of the curve where it's hurting, and what I'm hearing is from some of the middle class and upper-middle class folks who have their own businesses and maybe they are the only employee. Their policies are being canceled right and left, as we come up on the Affordable Care Act, where the policies have to include certain features--I don't want to call it gold-plated--but you do have a broad range of things that have to be covered, and they can't be just Band-Aid type insurance policies. They have got to be real insurance with very few limits on them. So consequently, many old plans are being canceled, and the news plans that are being offered are significantly more expensive.

The people I talked to are either facing an increase of as much as $5,000 on their deductible to keep the same premium, or their premiums are going up fairly largely. And I think that has really hit that consumer, who is pretty active in the marketplace. It's not like the super-rich, that don't really care what the [health-care insurance] number is, and it's not the low-income people who don't have much money to spend. It's a critical part of the economy.

Stipp: These are folks who probably won't be getting subsidies, but will be paying a little bit more potentially, because the insurance policies are required to include more as part of the ACA.

Johnson: Right.

Stipp: So when they see those numbers, they may pull their spending in a little bit, waiting to see, how much is this [insurance] really going to cost us?

Some other issues you say might be affecting spending right now are higher taxes that folks might have to pay.

Johnson: There are a few things happening there. We had the payroll tax that hit at the beginning of the year, and then as we moved into August through September, when people actually had to make their payments on their taxes and calculate what their taxes are going to be for next year, that probably hit some of the high-income earners a little bit and forced them to look at the data again.

One other thing that we're finding that we should all keep an eye on is a lot of the mutual fund organizations are having usually large [capital-gains] payouts this year after many years of not having any payouts. Now people are going to have to go back and adjust and rethink what they're going to have to do relative to their taxes. Unfortunately, it doesn't give them any more money to spend. The money is still sitting reinvested in the mutual fund, but they're going to end up paying the taxes on those reinvested [capital gains]. So that's going to start to weigh on things, too.

Stipp: For some of those funds, a lot of their tax-loss carryforwards from the financial crisis have been used up, so now they're going to have those capital-gain distributions that will be taxable, potentially a bigger tax liability for fund investors [in taxable accounts].

Some policy changes with regard to food stamps might have also put less money into the pockets of folks who do tend to spend it.

Johnson: That program was expanded rather dramatically with the stimulus package that came out. Those extra benefits ended as of Nov. 1. That's probably going to hurt some of the lower-end stores. Even today, we saw Wal-Mart's numbers weren't anything really to write home about on the [comparable] store sales. They had some great cost controls, but the [same-store sales] numbers didn't look so good, and they'll probably be under continued pressure. Any [business] that has [customers who] use the SNAP program will probably be affected, because it was a relatively meaningful cutback in that program, and it was as of Nov. 1.

Stipp: An issue that's behind us now that we hopefully will recover from is the government shutdown and the furlough. Do you think that we'll see at least some improvement, because that uncertainly, at least for a few months, have been cleared up?

Johnson: I'm hoping so, but as good as things are in gasoline prices and stock prices, it's just amazing that we aren't doing a little bit better. I do think that's certainly another issue that's out there that's weighing on spending. Because you don't know--is [the shutdown] going to happen again? Is something going to change?

Stipp: You mentioned the stock market and the wealth effect. Why hasn't the wealth effect had more of an impact on consumer spending? We are seeing stocks day-by-day sometimes reaching new highs.

Johnson: Typically people only spend a small percentage of their [investment] gains, and the number I typically cite is 3% to 5% of their gains. Only a small bit of any short-term gain gets spent, and actually that 3% to 5% I talked about tends to get spent over three to five years, because selling stocks incurs more tax liabilities, and some of the gains are embedded in IRAs. There are gains that people don't really want to touch. So the money doesn't flow straight back into the market, unfortunately. The Fed hopes it would, but I don't think it really has.

Stipp: Even if you did have those gains, you might not need to spend that money as a consumer.

Johnson: That's right. If you've got some of those big 401(k) balances and account balances, chances are you're not spending all your income, and you can say, I don't know what's going to happen with my insurance bill. I don't know what's going to happen with my tax bill. I'm just going to be a little cautious [in my spending].

Stipp: Given that we have these background issues that likely are holding back consumer spending, and are maybe overcoming some of the tailwinds that you mentioned, such as gasoline and the wealth effect, what things will you be looking at to get a sense of who is winning out here, the tailwinds or the headwinds?

Johnson: I'm hopeful that things begin to look a little bit better, and where I'm going to be looking is the retail sales report next week to see if maybe we show some pop there. Even if the whole number doesn't go up, maybe eating out goes up a little bit, or some of the apparel categories look a little bit better--though apparel has got some weather issues. But there are some categories I'd like to see do well, even if the whole number isn't good next week.

The government consumption report, when that comes out, it's always a little bit dated, but that's always more comprehensive.

The third thing would probably be auto sales. That's a little bit less subject to [external factors]. If you need a car, you need a car. You either think you're doing pretty well, or you're not, and you're not letting the little, short-term issues get in your way. Auto sales had a great August, and they've been slumping since. So I'd like to see a bounce-back there. Unfortunately, November is not a great auto month; December is usually one of the bigger car-sales months of the year. So it may be December before we really know the answer to that.

But I do feel that the underlying data should support a better consumer spending environment. It just hasn't shown up yet.

Stipp: It sounds like there are a lot of complicating factors on the consumer right now in the U.S. Bob, thanks for helping us pick apart the pieces.

Johnson: Thank you.

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