US Perspectives: Consumers Get a Little Holiday Cheer

Consumer spending has been accelerating for more than a year, as we now enter the holiday shopping season.

Robert Johnson, CFA 30.11.2010
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The past data-heavy week played out largely as I hoped, with consumers continuing to accelerate spending into the holiday season. Unfortunately, housing remains in the doldrums and manufacturing looks like it's slumping again. As I have been talking about for some time, real GDP growth was revised sharply upward to 2.5% from 2.0% for the September quarter, comfortably ahead of June's more modest 1.7% growth.


Outside geopolitical events, including the military situation in North Korea, fears of new debt problems in Europe, and further tightening measures in China, continue to rightly weigh on the markets despite last week's positive sets of economic data. I will say, however, that this round of the European debt crisis seems to be scaring consumers much less than it did last spring. A modestly slowing Europe is not a disaster for the United States economy (U.S. exports to Europe in total are in the very low single digit percentages of U.S. GDP, and U.S.-based banks' exposure to Europe is modest). However, a shell-shocked U.S. consumer would be big problem.


Holiday Sales Growth of 3% Seems to Be a Real Possibility

The data and statistics I see are consistent with holiday same-store sales in the 3%-4% range (compared with a range of 1%-2% for last year, depending on the survey). Driving the improvement are higher consumer incomes, lower initial unemployment claims, improved employment, and a stock market that is about 12% higher than a year ago. Revised data last week showed that U.S. consumption levels have now exceeded December 2008's high and then some. Based on improving auto sales data, consumer confidence in the real economy seems to be improving. After bottoming at 9.2 million units in February, 2009 car sales moved up to just 11.1 million units in December 2009. After bouncing around and making no net progress in the first half of 2010, sales have been up three of the last four months, with October sales now at 12.1 million units on a seasonally adjusted annualized rate. These are big-ticket, long-life assets that seem to be indicating renewed consumer confidence, despite lackluster results out of the major confidence surveys.


Manufacturing Still Soft, no Need to Panic

Meanwhile, the manufacturing sector continues to peter out as it usually does at this stage of the recovery. Durable goods orders for October were even bleaker than I had expected, down 5%. Orders were still down when excluding the volatile transportation sector. One anomaly in that data set is that the backlog of unfilled orders continues to build even as orders shrink. That backlog of unshipped orders should keep production from falling apart in the short run. October is always a little tricky in manufacturing because it is this first month of the quarter for most firms. The push to get things out the door in September to make quarterly quotas often means a temporary lull in the first month of the next quarter. I am also consoled by the fact that on recent quarterly conference calls and at various analyst meetings for major manufacturers, we are hearing no news of softening business.


Real Estate: Another Yawner

On the real estate front, I want to reiterate that existing home sales (because they are treated as an asset purchase) and new home sales (1% of GDP at best) can do little to hurt GDP growth from here--though they're not going to help much either. Until employment and incomes get better, housing can't improve a lot. That said, existing home sales were down modestly at negative 2.2%, as foreshadowed by last month's pending home sales report. A decent portion of the decline was due to some of the foreclosure moratoriums. A bigger surprise was that new home sales slipped 8%. I had hoped this number might eke out a small gain as the moratorium issues on existing homes should have provided a favorable lift for new home sales that aren't subject to the moratoriums. There was one silver lining in the housing reports: inventories of both new and existing homes were down in October, taking at least some pressure off of the housing market.


Consumer Incomes and Spending Accelerate

On the consumer front, both consumer incomes and spending were up about 0.3% in October even after adjusting both for the effects of inflation. Recall that consumption represents about 70% of the U.S. economy. The trend in consumer spending has been accelerating for more than a year, as shown in the table below.


Real Consumption Growth From Prior Quarter


Quarterly (%)

Annualized (%)
















Source: Bureau of Economic Analysis


Though just for one month, the October consumption figure released last week grew 3.6% annualized, representing yet another potential acceleration in the fourth quarter. Durable goods continued to do far better than both nondurable goods and the huge services category. The services category was flat in October, at least partially due to a warm month reducing demand for natural gas and electricity. A more detailed analysis of the sluggish services category was not available at this time.


Initial Unemployment Claims Drop Sharply

Though I refuse to hang my hat on just a few weeks of data, the initial unemployment claims data have shown market improvement over the past few weeks. In the chart below we see that initial unemployment claims improved sharply in 2009 and haven't really made a lot of headway since then--that is, until November. The four-week moving average of initial claims fell to 436,000 last week, lower than any time since August 2008. The less reliable one-week number dropped to 407,000, putting the psychologically important 400,000 level within spitting distance. My guess is that next holiday-shortened reporting period remains tame, although the numbers typically back up a little again in December despite the seasonal adjustments.


Initial Claims Resume Improvement


Weekly Initial Claims
End of Quarter


(Peak) 658,000















Typical Trough


Source: Bureau of Labor Statistics
Morningstar Estimates of Typical


No Holiday for the Data Gatherers

This week brings a slew of new data, including key manufacturing indexes, auto sales, home prices, and employment. I expect more of the same: crummy manufacturing numbers, anemic housing data, but real growth in employment and hours. The employment report is the only one I really care about this week. We might also see remarks about Black Friday sales, though I don't find them terribly predictive as consumers and retailers have a lot of time to make midcourse corrections to their holiday strategies. My guess is consumers will have the upper hand this holiday season, and retailers (other than Apple) will have to price goods attractively.



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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