November's Consumer Spending Report: Trends and Red Herring

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 |  Includes: PMR, RTH, XRT
by: Markham Lee

November's consumer spending number came out Friday and it indicated a 7.8% YoY drop in overall spending. However it's definitely a set of data points that leaves much to interpretation, due to the combination of falling gas prices, the impact of the credit crunch on car sales and the deep discounts offered by retailers during the Black Friday shopping weekend.

I.e., is the latest report more of a function of price changes and the credit crunch, than it is a true reduction in consumer spending?

In response to the above the media's approach has been to back out spending on cars and/or on gasoline, and if we go by this spending dropped 0.2% if we ignore gasoline, and rose by 0.3% if we ignore gasoline and cars. While some in the media may spin this as positive let's not forget the fact that 0.3% lags inflation, and that due to the Black Friday discounts it's not something that will translate into a positive for retailers. When you're discounting items by as much as 70% a 0.3% in revenues will still leave you hurting badly, especially when combined with the multi-month declines that proceeded it.

Needless to say even if we see similar spending figures in December, this Holiday season will not be enough to turn things around for the nation's ailing retailers and we'll see more retail failures in the future.

Despite the fact that you can massage the numbers into appearing more positive than they are, some economists have called the numbers 'suspicious', and not only believe that they're worse than reported but believe that the inevitable revision will look worse than the report we saw today.

In order to provide you with more insights, let's take a look at how various categories performed during the past month:

  • All Retail Sales: -7.41%
  • Building Supplies & Garden Equipment: -5.33%
  • Car Dealers: -27.41%
  • Clothing Stores: -5.76%
  • Electronics & Appliance Stores: -4.66%
  • Furniture & Home Furnishings: -10.85%
  • General Merchandise: +2.59%
  • Grocery Stores: +3.48%

If you want a complete category by category break down of how various retail sectors performed last month, you can find it here (census.gov).

Looking at the numbers above, the picture 'appears' to be a trend of consumers cutting back on discretionary spending categories and increasing spending on key necessities, thus supporting the idea that things are still pretty bleak for the retail sector. However it's worth noting that inflation undoubtedly influenced food sales and many retailers that fall into the "General Merchandise" category sell electronics, home furnishings and clothes, even if they're not necessarily the preferred shopping destination for many of these items.

I.e. the numbers above are a function of consumers cutting back, shifting their spending around to different retailers and inflation.

Overall I would say that things still look pretty bleak for the retail sector even if reduced gas prices are mitigating the impact on non-gas retailers, and when coupled with the multi-month spending trend I don't anticipate that many retailers will report positive results in January when the Q4 earnings and holiday shopping season reports start coming out.

This is especially true when solvent retailers feel that a major threat to their Holiday sales are their competitors going out of business sales.

Sources:

U.S. Census: "Estimated Monthly Sales For Retail And Food Services, By Kind Of Business " -- November 2008.

The WSJ: "Retail Sales, Whole Prices Fall" -- Jeff Bater, Brian Blackstone, December 12, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.