The State of the Consumer

This week’s surprise Consumer Confidence report gives us yet another reason to take a step back and survey the landscape. Much of the recent focus has deservedly been on unemployment while little focus has been given to other aspects of the consumer and more importantly, the overall state of the consumer’s mind.

Clearly there are several enigmas manifesting themselves in both confidence and spending patterns. This week we’ll take a closer look at some of these issues, and probably generate quite a bit of debate as well.

Desensitization

Increases in consumer confidence during the past two months are indicative of desensitization. Consumers are becoming acclimated to weak economic conditions, poor stock market returns, and the continued accumulation of job losses.

This desensitization has been emphasized by the mainstream media; particularly in the past few months. The take-home message of articles and news reports has shifted to ‘be happy things aren’t getting worse’ and people are doing just that. Bargain hunters have been lured into many areas including housing, stocks, and even retail products. Meanwhile, important fundamentals like GDP, unemployment, foreclosures, and household net worth go largely unmentioned and underanalyzed.

Where are Consumers Spending Their Money?

What is telling, however, are the reports coming out of some individual sectors in the consumer landscape. Traditional economics breaks goods and services down into two major categories: staples and discretionary. This division follows the old-school definition of needs vs. wants.

However, today, the lines have been blurred quite a bit and goods that would have easily been considered discretionary even 10 years ago are now regarded as staples.

The following NAICS category charts were selected because they represent areas that are extreme examples in the staple—discretionary continuum. And for comparative purposes, the total US Retail Sales chart is included at the end of the series.

The situation with grocery stores is a primary example of how aggregate consumption numbers are reported, which will be explained in greater detail later in the article. Just reading the chart, Americans spent less at grocery stores from the middle of 2008 through the beginning of 2009, which is when we called the bottom in terms of consumer prices. Did people eat less or just spend less on what they purchased? In all likelihood it is the latter, given that grocery store shopping is one of the most basic of spending types.

For the sake of thoroughness, included below is the same chart for big-box/warehouse type stores just in case everyone abandoned their local grocery store for lower prices at BJ’s (BJ) and Sam’s Club.

You’ll notice quickly that the rate of growth in warehouse club spending has been declining steadily since the beginning of the decade. Spending has also flattened considerably in the past 6 months. Clearly Americans didn’t take their unspent grocery store dollars and run to the warehouse clubs, so our initial conclusion is intact.

Gasoline station spending fell off a cliff from July through December, indicative of falling gas prices and people cutting back on the purchases of accoutrements such as drinks and sandwiches. In a similar fashion to grocery store sales, there has been a recent increase in spending at gas stations reflected by the price of gas jumping from near $1.50/gallon to around $2.00/gallon nationally.

Obviously, jewelry is far at the other end of the staple-discretion continuum, and is a good indicator of purely discretionary spending. It is pretty apparent, at least from this graphic, that this type of discretionary spending (in total dollars) is contracting rapidly, now at a year over year rate of around -22%. Massive discounting by many national and regional jewelers have certainly contributed to fewer total dollars spent as well.

Above, we notice the same tail in total retail sales starting at the beginning of 2009. This change in total retail sales correlates well with our data on consumer level inflation and brings the mainstream’s assertion of the re-emergence of the consumer into question.

Inflation Returns to Consumer Prices

In early January, a number of our in-house statistical indicators turned positive in terms of the spillover of monetary inflation into consumer prices and we discussed this issue in detail in 2/20/2009’s article “The Turning of the Tide?”:

If we have indeed witnessed the inflection point where the trillions of dollars parked in investment and commercial banks are finally being let out to play, then our wealth and purchasing power are about to come under serious attack. Obviously the risk in putting such an assertion to paper is that if we return to the previous trend of falling prices even for a brief time, the entire construct will be discredited rather than the possibility that the timing was a bit off being acknowledged. There are some factors that would help us to confirm or deny that such an inflection point has taken place……

Since those indicators went positive, we have received affirmation of our observations from PPI/CPI, the GDP Price Index or GDP Deflator, nominal retail sales, and import prices. It is the retail sales portion that applies here, and the key lies in how that report is interpreted.

It absolutely must be remembered that almost all of these aggregate spending metrics report in total Dollars, NOT units. Nor are these numbers adjusted for ‘inflation’. They are adjusted for seasonal factors that are at the discretion of the reporting agency, but that is it. What this means is that increases in consumer prices (especially in staple goods since people are less likely to cut back) will be interpreted as economic growth when retail sales are reported because people are spending more money.

Conversely, when prices fall like they did from July through December of 2008, the interpretation will be economic contraction.

So the question needs to be asked: Did people actually buy fewer goods and services (an actual retrenchment) over the past 6 months or did they just pay less for some of the things they purchased thereby causing retail sales to drop? The answer is more difficult to find than one might imagine.

We know from the Advance GDP report on Wednesday of this week that personal income in the US dropped by an estimated $59 billion (2.0% annualized) as job losses put more and more Americans on the unemployment rolls. The rate of decay in personal income grew from $42.9 Billion or 1.4% annualized in Q4 2008. The report also gleaned that personal outlays increased .7% in Q1 2009 after falling 9.5% in Q4 2008.

Looking for example at the CPI for that period, we find that using the old CPI methodology that consumer prices increased 1.18% for Q1 2009. By extension then, if consumers would have purchased the exact same quantity of goods as they did previously, they would have spent 1.18% more yet they only spent .7% indicating that less goods/services were purchased. A terribly small cutback for sure, but certainly not the growth trumpeted by the mainstream media.

For comparative purposes let’s apply the same analysis to Q4 2008. Using the same CPI methodology as the previous paragraph, consumer prices dropped 2.93% in Q4 2008. So if consumers had bought the same quantity of goods/services, they would have spent 2.93% less. Yet consumers spent 9.5% less indicating a significant cutback.

One conclusion we can draw from this cursory analysis is that while consumers spent more in Q1 2008, they didn’t really buy more. Still, in the face of rising unemployment, falling housing prices, and general economic malaise, consumers are still trying hard to hold onto yesteryear after a very brief period of belt-tightening.

Comments

[Alan von Al...:]

Andy, this is great. Very precise. Thanks.

May 03 06:58 AM

[traden4alpha:]

Rather than look at consumer demand, to understand where the economy is going, we should look at consumer's cash supplies.

First, unemployment will surely drag on consumer spending both directly (unemployed people have less money to spend) and indirectly (employed people may worry more about jobs and spend less). As long as unemployment remains high, consumer spending won't recover to pre-crash levels.

Second, the more important factor is the recent role of debt in spending. Increases in debt, especially withdrawals of home equity, provided the cash that gave us about 7-10% of GDP in recent years. With the decline in home values, that cash-out refinancing boom is over. Moreover, that debt must be repaid either directly (e.g., high interest rate credit card debt) or indirectly (e.g., higher tax rates to cover government debt and lower corporate profits to cover debt payments).

The point is that GDP is going reset about 7-10% lower, with the worst case number somewhat more likely given the high rate of unemployment and the fact that housing prices are still falling.

We're not at the bottom of the economy or the market yet.

May 03 08:03 AM

[biomedlives:]

In addition, note that low interest rates and recent dividend cuts mean that anyone getting significant income from interest and dividends will get less this year than last.

May 03 09:24 AM

[Doc 224899:]

"Consumers" are self-segregating into two groups, and the actions of these two groups are what should be followed.

One group, the higher-functioning one that is coincidentally a smaller group, has sized things up and has basically stopped spending money on stuff they don't need. Every now and then they buy crap in WalMart that they bring home and throw in a closet and never look at again, like they used to do, but for the most part they've forced themselves to grow up and wise up. People in this group buy a car and hold on to it until it's really old, and change the oil and keep it repaired, and either have never paid a credit card interest rate in their lives or they got caught once and paid it off and vowed never to do anything that stupid ever again. These people don't need the president to protect them from credit card companies, and have never even been close to defaulting on their mortgages, and can operate power tools without being injured. This group will always be small, and will always be resented by the other group.

The other group, the lower functioning one that is the larger group, still spends money on stuff they don't need and still wonder why they have really high credit card bills. They get new cars every three or four years, and either take on the burden of car notes or lease cars they could never afford to buy and then get taken by surprise when the total cost of the lease turns out to be more expensive than the advertized monthly fee led them to expect (duh). They need the president to protect them from credit card companies (though nothing the president does will make a difference because stupidity is an indelible stain that can't be wiped off), will never pay off a mortgage in their entire lives and shouldn't even try to buy a house, and they can't handle power tools without getting hurt no matter what gets printed in the WARNINGS. The more this group is protected, the larger and dumber it gets.

May 03 10:53 AM

[Karen Consumer:]

Andy, I wish you were on TV instead of the big 4. My jaw hit the floor when I heard about the jump in consumer confidence. News orgs must have the same group of people on speed dial when they do these stories and polls. Everybody I know has tightened their belt and is in it for the long haul, no unnecessary spending, and have even taken to offering to buy/trade each others autos rather than have to go to a dealership. And we're supposed to be in one of the "better off" states (Texas).

May 03 12:10 PM

[John Booke:]

Recently medical care has gained dramatically as a percentage of spending from disposable income. Serveral reasons: 1)Medicare/Medicaid payments to physicians have increased this year and since private insurers follow Medicare payment codes and fees overall medical insurance premiums are up across the board. 2) Relatively speaking spending on consumer "goods" has decreased allowing spending on "services" to gain a greater share of disposable income. 3) Demographically we're showing our older age by making more visits to the doctors.

May 03 02:24 PM

[Market Sniper:]

Excellent, Andy!

As households struggle to shore up tattered balance sheets, the trends we are seeing will continue. Pay down of personal debt continues at a good clip, savings rates are rising rapidly and cost cutting is now the in thing. All well and good. However, savings will be largely soaked up by increased government debt and with the on-going consumer retrenchment, from where will come the engine of growth? More people are becoming less secure about their jobs as well. What we maybe seeing is a complete generational shift in attitude and behavior which could well last decades. Such shifts do not turn on a dime but take time to develop. As economic conditions worsen this shift will become more pronounced.

May 03 03:04 PM

[tc1:]

Insightful article and insightful comments from everyone.

One thing that i and others see crucially important for the longterm in our economy is a BIG SHIFT BEYOND the "junk jobs" paying unsustainably low wages (see Barbara Ehrenreich's poignant "participatory-observa... book, Nickel & Dimed) and a BIG SHIFT TOWARD more living-wage jobs. This could easily be part of a renewed U.S. trend toward innovation, engineering, and manufacturing-- especially in the "greentech" area that the visionaries like Lester Brown et al. have been beckoning us for decades!

For, to revive healthy capitalism, we need a more massive, widespread base of consumers/purchasers of the goods and services provided by American businesses. Henry Ford knew the truth: unless my workers (and workers for other companies) have more income, they can't spend money on my cars or any of my industrialist-friends products and services.

With more income, one has a consumer with more robust health, resources and resilience for the long term. It's that simple.

I daresay it's "NOT just 'the economy,' stupid." More to the point: it's "less income disparity and more real wealth for everyone, my friend." :-)

May 03 04:36 PM

[henarl:]

Desensitization is the key word in describing rising consumer confidence. It's like being blinded in one eye and then discovering you can still see, even if not as well as before. Watch out for that other eye in the future tho!

May 03 06:27 PM

[Blackeyebart:]

Traden4alpha says "As long as unemployment remains high, consumer spending won't recover to pre-crash levels."

This bothers me. It assumes that a recession is an aberration. A sort of collective mistake. People will get over it, and things will get back to "normal".

I view the recession as a correction. A return to fundamentals. A chance to get things right. To clear out crappy stocks and crappy thinking.

Pre crash normalcy is something we should not aspire to.

May 04 04:59 PM