Consumer Confidence Stinks, Yet Consumer Spending Keeps Chugging Along

Includes: DG, DLTR, FDO, JWN, RL, TIF, WMT
by: The Financial Lexicon

Consumer confidence is in recession. Housing is in recession. Job growth is unimpressive. Income growth is unimpressive. Outflows from domestic equity mutual funds are at levels not seen since the depths of the 2007-2009 bear market. But guess what: Thus far, consumer spending is holding up reasonably well, especially given the circumstances. So why is the conventional wisdom of a strong correlation between consumer confidence and consumer spending breaking down? Is it a tale of the worse we feel, the more we spend? Are consumers drowning their miseries with indulgences? Perhaps not.

On Thursday, Bloomberg’s weekly Consumer Comfort Index was reported at a very depressed level of negative 51.6. The most recent Consumer Confidence Index (CCI) from the Conference Board came in well below expectations, down 6.6 points to 39.8. This is all the way down from 70.4 in February. Likewise, the University of Michigan’s Consumer Sentiment survey remains firmly in what has historically been considered recessionary territory. The latest reading, 64.2, is well below readings that have accompanied recoveries over the past three decades. In the 1980s, 1990s, and early 2000s, it was not uncommon to see this survey print numbers of 90 and higher. Furthermore, this year, Wal-Mart’s (WMT) CEO has repeatedly told us that consumers are struggling, trading down to name brand or cheaper items and even running out of money at a faster clip toward month end. Meanwhile, dollar stores like Family Dollar (FDO), Dollar Tree (DLTR), and Dollar General (DG) are thriving during the tougher times and benefiting from the trade down effect. The dollar store stocks were among the places to be in the equity markets this year.

On the flip side, Tiffany & Co.’s (TIF) most recent earnings release sported the headline, “Tiffany Reports Substantially Higher-Than-Expected Sales and Earnings Growth In Its Second Quarter.” Nordstrom’s (JWN) stock is trading 31.68% above its 52-week low, whereas the S&P 500 is trading just 16.47% above its 52-week low. And Ralph Lauren’s (RL) stock has quintupled since its November 2008 bottom and is currently trading 53.30% above its 52-week low.

So how can high-end retailers be doing so well with consumer confidence doing so poorly? It can’t just be that many high-end retailers serve a global audience. After all, as recently reported by Nielsen, “Global consumer confidence remained weak in the third quarter with more than 60 percent of consumers saying it was not a good time to spend.”

Perhaps the reason for the dichotomy between consumer sentiment surveys and consumer spending data is simply the result of how the consumer sentiment surveys are constructed versus which income groups drive consumer spending. After all, consumer sentiment surveys question a wide variety of American households, while a large portion of consumer spending is often said to come from the top income earners. Let’s investigate:

Within that Bloomberg Consumer Comfort Index report that came in near the all-time low, Bloomberg breaks down the survey results by income group (the report on leaves some gaps between income levels). The results are quite eye-opening:

Annual Income

Consumer Comfort Index

below $15,000


$15,000 - $24,900


$25,000 - $39,900


$40,000 - $49,900


$50,000 - $74,000


$75,000 - $99,000


over $100,000


Clearly, people making less than $25,000 are quite sour on their financial situations. In fact, this group of people is far more sour than the headline number suggests. As we move up the income strata, things start to improve and generally continue to do so all the way to the top income earners, who are actually much less sour than the headline number suggests.

Now the question is, to what extent do people at the top drive consumer spending? Consumer sentiment surveys are compiled with responses across the income spectrum, but if one group of income earners has an outsized influence on consumer spending data, then that would help explain the dichotomy between consumer confidence being in the doldrums and consumer spending hanging on. To help answer this, let’s take a look at the latest Consumer Expenditure Survey released on September 27 by the U.S. Department of Labor. Among other things, this report, with data through 2010, shows average annual expenditures across quintiles. The lowest 20% were reported to have spent an average of $20,953, while the highest 20% came in at $92,870. Furthermore, the top 20% of earners were reported to have income after taxes of $150,144, clearly putting these people into the top category of Bloomberg’s Consumer Comfort Survey.

If the top 20% of income earners are spending close to four-and-a-half times what the bottom 20% are spending, it seems reasonable to believe that this group of people will have a larger effect on consumer spending trends. According to the aforementioned Bloomberg Consumer Comfort Index survey, the top group of income earners is feeling quite cheery when compared to the bottom income earners. This is data that is not visible from the headline number but is buried within the report.

However, before I infer that the top income earners, who aren’t feeling nearly as bad as lower income earners, are pulling up consumer spending numbers, let’s make sure the Bloomberg survey actually asks about spending intentions and/or the personal finances of those being questioned. In fact, two of the three questions do just that. One is, “Would you describe the state of your own personal finances these days as excellent, good, not so good, or poor?” And the other is, “Considering the cost of things today and your own personal finances, would you say now is an excellent time, a good time, a not so good time or a poor time to buy the things you want and need?”

Given all this, it doesn’t seem impossible to infer that some smaller percentage of income earners are having a disproportionately larger positive influence on consumer spending data, while a likewise smaller percentage of income earners are having a disproportionately larger negative influence on consumer confidence data. The result is a headline consumer confidence number that doesn’t give us the clearest picture of what is going on.

I recognize that this is an analysis of just a small slice of the mountains of data that exist on consumer spending, household income, and consumer sentiment. My hope is that this might open a window in terms of how people are approaching their analysis of consumer confidence versus consumer spending. I would love for those who make their living analyzing this data to move us beyond the basic reasoning of, “consumers may feel bad, but that’s not stopping them from spending” to something more concrete, something that helps to illustrate what so many Americans know is happening: there is a tale of two distinct American economies. One is doing just fine; the other is struggling. Providing data that more accurately reflects this reality might help us all make better investment decisions.

Disclosure: I am long WMT.