Consumers Still Bargain Hunting

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Bob Johnson, Morningstar's director of economic analysis. We're going to take a closer look at the consumer and see how shoppers are faring.

Bob thanks so much for joining me today.

Bob Johnson: Thank you for having me.

Glaser: So you've mentioned a few times that the consumer is really key to the recovery. We have gotten a number of data points during the last two weeks kind of pointing to maybe an improvement in consumer spending and an improvement in the consumer sentiment. Can you talk to us little bit about that, maybe starting with ISM Services Index from this week?

Johnson: Sure, this week he got the ISM services number, and it was about 53. Remember 50 is kind of what people say is a demarcation between growth and shrinkage. So, people thought that number might get worse especially in light of the budget debacle and the things that happened particularly in early August as well as the European situation. But instead the number showed improvement, and the services sector is extremely important. It's much larger than the manufacturing goods and construction part of the economy; 2 to 3 times as big. So it was good to see that number tick up, and I think the market reacted well on Tuesday to that ISM number.

Glaser: So, with services expanding, what about consumer spending?

Johnson: Well, there was a big national report last week, which we didn't have time to talk about, but consumer spending in one single month grew 8/10 of 1%. And even after you subtract out inflation, it was up 5/10 of a percent. So if you annualize it, that's 6%, which a really high number for consumers. Usually we're pretty satisfied to have a number more like 3%. So we're very pleased with the number, some of that is because auto sales came back and the weather was particularly favorable (and we talk about months when it is unfavorable). So we have to be a little careful about extrapolating from that one number, but certainly consumers haven't run for the hills.

Glaser: But even so, it was a pretty solid showing from the consumer. You also look at some weekly data does that kind of corroborate that consumers are really out there spending?

Johnson: Yes, we have kind of had numbers out there, and we have been tracking between 3% and 4% for probably a year and a half. Maybe we have an occasional month where we creep up close to 5%, but we're still in that 3% range. Now this week we were just a little under 3% for the one week but that is related to Hurricane Irene and the East Coast; we were basically shut down on the East Coast for a couple of the weekend days. So that hurt the numbers just a little bit. But we are still in the range of 2.5%-3.5% that's going to keep us going. So I was really pleased to see that we held up, and now maybe next week we will get a little bit better of a number if things begin to stabilize from the storms.

Glaser: So certainly there is maybe a little bit of a conundrum here that we have had. There's a lot of uncertainty and a lot of bad news coming out, but consumers still seem to have enough confidence to go out there and actually spend. Can you talk to us a little bit about the psyche of the consumer right now? Do you think people are just feeling really comfortable so they are out there spending, or are they kind of changing their spending habits in a really meaningful way that could last for a long time? What is your take on the consumer?

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Johnson: I think the consumer is being smarter than people have given them credit for. I think they have done a very, very good job of adapting, and I certainly wouldn't want to be retailer to try to outfox the consumer right now because they have really done some pretty smart things. One of the things that we have talked many times is Wal-Mart being weak this recovery, and part of it be attributed to the firm being dependent on the low-end consumer, which is certainly maybe part of the problem. But at a recent conference, I heard a Wal-Mart executive state that Wal-Mart can actually predict its weekly sales based on the price of gasoline more than anything else. I guess Wal-Marts are relatively well-distributed, and it can be half-hour drive to Wal-Mart, maybe 40 minutes in some parts of the country, in major parts of their base. If you have to drive that far, people are saying, "I'm not going to go there. I'm going to do a little bit of fill-in from this store; I'm going to the dollar store and pick that up. I am not going to drive 40 minutes all the way to Wal-Mart and spend all that gas because it'll eat up my savings." So the firm has done that.

Then we have what I've heard called as "the Groupon effect," where people are now expecting big discounts, and unless they see a big discount on an item or a sale they are not likely to buy it. That is kind of a good news and bad news. Certainly they are not interested in buying anything unless it's on sale. Unfortunately the retailers will wise up to that, and they will start raising the base prices and then having the sales afterward which is an unfortunate consequence. But we are seeing some of that behavior, as well.

And then when prices stay high consumers run away. I mean we have seen in the auto sector when we got the shortage of Japanese cars and the lack of rebates, sales fell from 13.5 million to 11.5 million overnight. Gasoline sales have been trending up for three quarters in a row, but we've seen gasoline demand trend down for three quarters in a row. So consumers are reacting and reacting wisely to increases in prices and maybe surviving all of this a little better than we might have thought.

Glaser: It sounds like we don't have the case of unbridled exuberance for spending, but when people are seeing a deal, they feel confident enough to go ahead and take advantage of it?

Johnson: Exactly.

Glaser: So let's take a look at jobs then because without a job people aren't going to be out there spending, and tonight, we are going to hear from President Obama about the reported $300 billion jobs plan. We are getting a little bit more detail about it. What do you think about it? Do you think it is going to be able to make a big difference?

Johnson: Well, I don't think it is going to make a huge difference, but there are a few things that he could do. I think we talked about it in last week's video: we can have a payroll tax holiday; we can extend some of the unemployment benefits; we can do some retraining programs; we can do some more infrastructure things. Again, there really probably isn't a panacea in those. And maybe they patch us all kind of through this a little bit. I just hope the government doesn't go too wild on it. For example, extending the unemployment benefits has had the perverse effect of making people not want to look for work because they're collecting benefits, and we hear this again and again. And with the infrastructure projects, I am somewhat concerned that it is going to take too long for them to really make a difference in helping the people who are unemployed, the ones who are going to get those kinds of construction jobs anyway, and if are they in the right parts of the country.

My personal take is that it is going to take a little longer to come out of this recovery, that it is going to be a slog, and that we don't want to do anything stupid between here and there. But it is probably two or three years before we get back to something that we would vaguely call normal. But on the other hand we're not falling apart, and I think Obama needs to set the tone in his speech, saying, "You know what? There is something to look forward to here that all is not bleak."

And as I looked through the numbers, there certainly are things to be positive about and certainly productivity in general looked pretty good. I was at a council meeting recently here in Chicago where we heard about a lot of innovation, such as in the furniture industry, and some of it actually moving back here again as we heard from the chairman of Crate & Barrel. The innovation that is happening is really pretty amazing. So that's certainly a long-term positive.

I have a couple of pet peeves. We have to do something to get housing back in order. It was probably close to 40%-50% of all the jobs we lost, and unless the government addresses mortgage appraisals, such as how people with upside-down mortgages are going to get out of them or walk their way around them, it is really going to be hard to get back up.

The one other thing that I heard at this council meeting that was interesting is that the executives of these companies all felt that the regulation was a huge problem that really needs to be dealt with, such as that the government keeps on taking one step forward with stimulus and two steps back with regulation. They talked about some of the new regulations about unionizing small groups of people being a huge issue, and the firms have to put up signs starting Nov. 15 that said, "You have the right to unionize. You have a right to form your own small group of x-number of people, and the management will help you set this up," and so forth. And these are just the types of things that are out there.

There has been a lot of regulation and stuff talked about in fracking, which has been one of the big growth areas of the economy. So there are a lot of regulatory things that the government could really back off on a little bit and combine them with a positive tone of some sign of hope. This is about psychology; people are scared right now. But they've got more money to spend.

Glaser: Well Bob, as always, thanks for your thoughts.

Johnson: Thank you.

Glaser: For Morningstar, I am Jeremy Glaser.