Why the Consumer Is Hanging Tough

Posted by: Ben Steverman on May 19, 2010

For bearish investors, one of the biggest puzzles of the last few months has been the strength of consumer spending. In an era when the unemployment rate approaches 10%, where is the money coming from? Some even offered the theory that consumer spending was being juiced by foreclosures. The idea is that many homeowners are out shopping with the money they’re saving by not paying their mortgages.

It sounded improbable to me — and blogger Barry Ritholtz rightly pointed out there is little data to support it — but I have talked to a couple portfolio managers who seriously entertained the idea.

I wouldn’t dismiss the possibility that retail sales could falter later this year. But recent evidence suggests the return of the U.S. consumer is very real:

1.Retail sales rose 5.7% (year-over-year, not seasonally adjusted) in April.
2.Further disputing the mortgage theory mentioned above, spending at furniture and home furnishing stores was up 5.5%. Spending at home centers (building materials, garden equipment and supply stores, including Home Depot and Lowe’s) jumped 14%. Presumably, people don’t spend heavily on homes that they are expecting to lose in a foreclosure.

So where is the money coming from? Well, Americans have been saving, so there is pent-up demand for all sorts of products. Also, many Americans do have jobs, and the U.S. economy added 290,000 to nonfarm payrolls in April. Action Economics expects another 400,000 jobs this month.

But another key factor may be the financial markets. Fidelity Investments said today its average account balance rose more than 55% from Mar. 9, 2009 (the market’s lowest point last year) to Mar. 9, 2010. At the end of the first quarter of 2010, the average account balance was $66,900.

Such a revival in net worth can’t help but make Americans more confident
— especially those with substantial savings who are typically the biggest spenders. A survey by Deloitte, also released today, shows 55% of consumers “think the economy has started to recover from the recession” and 64% think “their household financial situation is the same or better compared to a year ago.”

The worry is that, if the stock market can lift consumers’ moods, it can also dampen them. While the S&P 500 is still up 65% from the index’s 2009 low, the current malaise in stocks could crimp spending if it continues.

Reader Comments

Isabel

May 27, 2010 5:45 AM

Great Article!!
Strongly agree,everybody has been saving since the crisis was announced(or even before)... that's where the money comes from.

Lisa

June 22, 2010 2:12 PM

I disagree!
I think it is very possible that some of those who chose to over-finance their homes and are currently not paying their on their mortgages ARE out there spending more money- they've already proven they don't have good money sense!
I can personally cite a couple who were just foreclosed on- they lived in their home for over 1 and 1/2 years payment free, have been collecting unemployment for a year and are going on a 2 week long cruise!!! They banked the money they "saved" by not paying their mortgage and are now blowing it on toys and dream vacations! I suspect some of the increase in consumer spending can be related to people who continually make poor choices with their money and spend without regard to their future. Somehow, our culture has become very poor at keeping our word- even debts (like mortgages and credit cards) are seen as something to escape by breaking our word by filing for bankruptcy.

Gary L. Kaplan

July 3, 2010 6:07 AM

You have consumer mood and the market action backwards. Endogenous mass mood changes produce the economy, the markets, the news, the booms, bubbles and the busts. The flash crash proved, again, news is not needed for giant market moves.
A clue from a big bear. These post boom bubble, crash things always, always, zig-zag. Jean-Paul Rodrique's descriptive chart, http://upload.wikimedia.org/wikipedia/commons/4/4b/Stages_of_a_bubble.png shows the stages of a bubble. A true bubble connoisseur recognizes this delicious stage. Your article supports the Bubble Hypothesis stage of belief that things are back to normal. So to say we are back to normal now means we are going on with the next post bubble resolution stage and the next stage is fear.
Alternate arguments for you could be, "it is different this time", or "ain't no bubbles in this house".
The bounce from the March lows is also a Fibonacci .618 retracement from the Oct. 2007 highs. If we get above this is the first obstacle to back to normal.
The Elliott Wave Theory holds that a wave 2 bear market rally ends just when people start to believe we are back to normal, politicians take credit for the turn around and most likely we make a Fibonacci retracement in the stock market.
We should see in the next couple of weeks if not next week I fear.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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