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.