US Perspectives: An Early Spring for Consumer Confidence

Consumers appear to be acting on their more upbeat sentiments, and trading up as well.

Robert Johnson, CFA 01.03.2011
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Market activity last week was dominated by political news out of Libya and fears of rising oil prices sinking our economic recovery. A combination of increased oil supply from other major oil exporters and the potential tapping of strategic petroleum reserves seemed to assuage market concerns on Friday. However, that confidence would be tested if political unrest were to spread to other parts of the Middle East--Saudi Arabia in particular.


The economic data last week were mixed. Consumer sentiment, corporate results, and reported economic data seemed to be somewhat in conflict. On the downside, GDP for the fourth quarter was revised down, not up as I had forecast, due to inflation-adjusted inventories and a sharper-than-expected drop in government spending. While definitely disappointing overall, the consumer spending portion of the report continued to show growth in excess of 4%, well ahead of the 2% level that typified most of the rest of the year.


Separately, durable goods orders looked great with 2.7% monthly growth; however, almost all of that growth was aircraft-related sales. Excluding those aircraft orders, overall orders fell, and so did capital goods orders. Seasonality factors and a strong year-end push both may have had a tendency to boost numbers for December and earlier, and depressed the January results. Again, I'd be watching the consumer--not manufacturing data--at this point in the recovery.


Measured and Real Consumer Sentiment Jump in February

Speaking of the consumer, reported consumer sentiment (as measured by the Conference Board and the University of Michigan) showed a sharp increase in February, especially among those households with incomes greater than $75,000 per year.


Weekly shopping center data seem to indicate that consumers are acting on their sentiments (something that doesn't always happen). Corporate data last week were supportive of a more willing consumer, too. Home Depot noted that big-ticket items were finally selling again. The number of Home Depot sales tickets over $900 increased nearly 10% year over year, while tickets under $50 increased a more modest 2%.


Consumers appear to be trading up as well. Sales at low-end retailer Wal-Mart continued to slip in the United States even as slightly more upscale Target showed some improvement, as did even more upscale Macy's in the most recent reporting period. Perhaps this trading up is the truest indicator of improved consumer sentiment.


Gasoline Price Hike Effect More than Offset by Payroll Tax Reduction

Most of these improved consumer surveys and corporate data came before the situation in Libya fully developed and the subsequent rise in oil and gasoline prices. An oil price hike is certainly not a good thing for the economy because it forces already-strapped consumers to forgo the purchase of other goods. That said, a $1 rise in the price of gasoline equates to about $25 billion of consumer spending per year. To put that in some context, the 2% payroll tax cut is expected to save consumers about $130 billion per year. Overall consumption in our economy runs about $10,000 billion per year. Oil prices, however, can affect a lot of other consumer expenditures, including airline travel and some home heating to name just a few.


One silver lining from the increased price of oil is that it has seemed to tame some of the inflation in a much broader range of commodities. Commodities--including copper, soybeans, and cotton--fell during the middle of the week as the crisis developed before jumping again on Friday as calming statements regarding oil prices caused a rebound in other commodity prices.


Mixed Housing News Fails to Move the Economic Needle

News on the housing front was mixed as existing home sales expanded, new home sales fell, and prices continued their slow downward slide of the past several months. The Case-Shiller 20-city price index fell 1% on a three-month moving average basis ending in December. Seasonally adjusted, the index fell 0.4%, hardly enough to cause any type of panic. Because this is a three-month moving average, and as median existing home sales prices declined further in January, this index is already set up for a couple of more negative readings. Beyond that, our housing team is growing more optimistic about the spring selling season as real-time data on new listing prices indicate considerable improvement in the months ahead.


New Home Sales Stumble

As expected, new home sales fell in January after the December rush to beat a new California regulatory regime. Unit sales of new homes declined 12.6% from December to January to 284,000 units (annualized, seasonally adjusted). That remains painfully close to the low of 274,000 units set last August. With a ready supply of existing homes, often at lower prices, new home sales continue to struggle. News on existing homes, a massively larger segment of the market, was better.


Existing home sales posted the first year-over-year gain since June. January's 5.36 million annualized selling rate was 5.3% higher than last year and 2.7% higher than December. Gains were driven by the West, which enjoyed an 8% increase. The Northeast's 4.6% sequential decline was the laggard. Total inventories decreased 5% from December and now sit 26% below peak levels, at 3.38 million units.


Investors should brace themselves for strong inventory growth starting with the February results, however, as our real-time data indicate sellers are coming out in droves now that the spring selling season has begun. Even so, the listings are being done at higher prices, indicating median prices may get a bit of a lift after January's drubbing. Last month median prices fell 3.7%.


The most interesting part of the report was the decline in condo inventory. It fell by 100,000 units, or 18.5%, from December levels. There are a couple of factors that could be at work here. One, increasing tightness in the rental market is making would-be sellers more willing to rent their units now that rents have increased materially. The other may simply be that the printed number is an anomaly and will be restated in the next couple of months.


Employment Data Should Improve, Even as Unemployment Might Creep Upward

The biggest news again this week will be the monthly employment report from the Bureau of Labor Statistics. The employment report has now taken on much more significance as we have moved from the early stages of a recovery, when employment results badly lag the general economy, to the middle stages, when employment growth is needed to sustain the economic recovery.


The consensus forecast is for growth of 172,000 jobs versus January's measly 36,000 (at least partially due to poor weather). Strong employment reports from several regional purchasing manager surveys, falling initial unemployment claims, better weather, and anecdotal evidence from companies suggest that a gain of 172,000 new jobs may be possible.


However, various flukes in the calculation of the unemployment data may show at least a modest uptick in the unemployment rate, even with the improvement in the number of net jobs created. The rate has fallen by 0.4 percentage points each of the last two months to 9%. A move back up to 9.3% would not surprise me at all. Weather, while still a potential factor in February, was less problematic during the actual week of the survey in February when compared to the measurement week in January.


Of course I will also be scouring the hours worked section of the report as well as the hourly earnings data in hopes of finding improvement of at least a couple tenths of a percentage point in each metric. It is a combination of the number of hours worked, hourly wages, and employment that drive total wage growth. Wage growth is what we need to drive spending in the months to come.


Personal Income and Spending Data for January Likely to Be Muted

The personal income and spending report is due on Monday; I suspect the data won't be as robust as in previous months. Low employment growth in January (reported more than a month ago) should keep a lid on the wage portion of the income data. However, improving rents, dividends, and interest could keep personal income growth close to the 0.4% of the previous month.


Based on a relatively poor retail sales report from a couple of weeks ago (driven by poor weather affecting building materials and restaurant sales), I suspect the consumption portion of the report is likely to fall from its brisk 0.7% pace in December to 0.3% in January. That's no reason to panic. Growth of 0.3%-0.5% is necessary to sustain the annualized consumption growth of 4%-5% that is embedded in my GDP forecast of 3.75% for all of 2011.


Manufacturing: Will the March Forward Continue?

The consensus forecast for the national purchasing managers' survey conducted by the ISM is for an increase to 61 from 60.8, one of the best levels of the recovery. Readings this high are usually associated with GDP growth faster than the 2.8% we saw in the fourth quarter of 2010.


I will also closely watch the ISM services number, which comes later in the week. While the goods portion of the economy has shown decent improvement this recovery, the services portion has thus far been a laggard. Poor results from Hewlett-Packard (which showed slower computer sales to consumers) demonstrate that we just might be moving from an iPad/iPhone electronics type of recovery to one more focused on services.


It will also be interesting to see whether the auto industry was able to sustain its sales momentum in February given the poor weather and sharply higher gasoline prices right at the end of the month. Sales the past couple of months have run in the 12.6 million range (the cycle low was around 9 million cars, and a more typical run rate is 15 million-17 million). The consensus is a rise to 12.7 million units based at least partially on more factory incentives and greater financing availability.



This is an edited version. The article originated from Robert Johnson’s column at

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Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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