Seeking Alpha
Value
Profile| Send Message| ()  

One of my favorite economic publications is the monthly Retail Sales Report from the U.S. Census. This is very important for reading which way the U.S. economy is going, since consumer spending drives over 70% of our economy, and this far into a recovery sales data is more important than manufacturing. Of course, this is very useful for investors both on a macro and micro level. Let's look at what happened overall, then how we can apply it to investing.

This month's report shows strong increases in spending, which does not surprise me, since we've been seeing some gains over the last few months in employment, hours worked and disposable income. Overall, consumer spending was up a powerful +1.1% from last month and +5.4% year over year. July to August were also revised up about +1%.

Gasoline prices tend to be volatile from month to month, so it is often excluded. Even with gasoline excluded, sales were up +0.9%.

These are very strong spending numbers, and gas is not driving it. As long as consumers are spending, the recovery should continue. Based on this data, I'd say it's likely that the recovery is still strengthening, and this spending should translate through to manufacturing soon, which has been in the doldrums lately.

Now let's look at some individual categories with some investing ideas.


(Click to enlarge)

First, autos continue to rock and roll. They are up an incredible +9.3% since last year. With average car lives still elevated, and credit still loosening, especially in sub prime car loans, autos sales still have a long way to run. Investor Watch: Even though GM (GM) is up 20% over the summer, it continues to be cheap at 8X earnings. Ford (F) is even cheaper, and gives a decent yield of around 2%. See building materials for more comments.

Next take a look at electronics, a usually dull category of late. Here we see a 4.5% increase since last month. Investor Watch: No brainer here; This is Apple (AAPL) and the new Iphone 5. With Apple on a moderate pullback, this could be a great buy.

Nonstore retailers is up month after month after month, as ecommerce continues to steal sales from traditional stores. Year on year here, we see a massive 15% increase. Investor Watch: Amazon (AMZN) is always the play here, but I'd wait for a pullback before buying. Stay away from traditional retailers which have been losing out to ecommerce such as Best Buy (BBY) and Gamestop (GME).

Gasoline has been on the rise lately, up 2.5% month on month, and 5.8% year on year. Spending increases on Gasoline could bode poorly for the rest of retail sales if it rises too fast, and thus, this needs to be watched. However, for now the consumer seems to be able to spend on gas as well as other things. Based on my observations, oil at around $110 is when the trouble starts, so we've got wiggle room left. Investor Watch: BP (BP) has really lagged some of its peers over the last year and is quite cheap at 7.5X earnings. Despite missteps, this is company is a strong cash generator and has massive scale.

Finally of interest is Building Materials. This category has been one to watch since construction and housing have finally turned a corner. This category is up 4.5% on the year, and 1.1% for the month. Improving construction will be a huge benefit to employment as well. Investor Watch: I really want to see Home Depot (HD) quarterly report. It's a winner I have been touting for a long while in this report. The stock has run up a lot on improved earnings, but sales growth has not been as robust. It has a great management team though. If they can come through with some strong sales, this stock could rise even more. Also, Nucor (NUE) and Steel Dynamics (STLD) and their steel benefit from construction as well as auto sales. I also like that they are mostly exposed to the strongest world economy, the U.S. They both have great yields too.

Overall, this was a very strong month for retail sales, and as long as this continues, the recovery continues. Based on this data, as well as employment data, I see the U.S. recovery strengthening.

Source: Strong Boost To Retail Sales For September 2012