Bloomberg News

Economy Revives as Consumer Shows What’s Done Refutes Sentiment

October 31, 2011

Oct. 31 (Bloomberg) -- Americans’ urge to shop is overriding anxiety about the economy.

While household-sentiment measures are at levels typically observed during a recession, an increase in spending during the third quarter boosted growth to the highest level of the year, Commerce Department figures showed Oct. 27. The schism partly reflects consumer ire with the government’s failure to reduce 9.1 percent unemployment or stem rising deficits, said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management.

“Emotionally based indicators are suspect,” Paulsen said. “There is a lot of anger out there. In a calmer time, these indicators might provide a better guide. Consumers are scared to death, but they are still spending.”

Consumption has tracked sentiment about 75 percent of the time in the past 25 years, Deutsche Bank estimated in an Oct. 25 report. Periods when the confidence measures proved unreliable include the aftermath of the 1990-91 and 2001 recessions, the bank’s report and Paulsen said. The most recent recession lasted 18 months and ended in June 2009.

The surveys also may be somewhat less useful now because wealth is more concentrated, said Omar Saad, an analyst at International Strategy and Investment Group Inc. in New York. The top 20 percent of income earners, who make more than $100,000 a year, may account for more than half of household spending, and they are under-represented in the confidence gauges, he said.

‘Resilient’ Consumers

Upper-income consumers have been “resilient,” Edward Yruma, a New York-based analyst at KeyBanc Capital Markets Inc., said in an Oct. 26 telephone interview. “Even if retail does slow, we still think the high-end will outperform middle- and lower-income retailers,” he said. He recommends buying the shares of Tiffany & Co., Coach Inc. and Nordstrom Inc.

New York-based Tiffany, the world’s second-largest luxury- jewelry retailer, jumped 27 percent this year through Oct. 28, while Nordstrom, the high-end department-store company based in Seattle, climbed 21 percent. Coach, based in New York and the biggest U.S. luxury leather-goods seller, advanced 20 percent. All have far outperformed the Standard & Poor’s 500 Index, which was up 2.2 percent.

Total consumption, which accounts for about 70 percent of the U.S. economy, rose 2.4 percent last quarter, the fastest this year, Commerce data showed. Retail sales increased 1.1 percent in September, the most in seven months, and vehicle sales climbed 3.6 percent, the most since March 2010.

‘Most Valuable’

Federal Reserve researchers have disagreed about how much importance to give confidence. The measures can improve forecasting “when the economy is weaker,” which can be “most valuable to analysts and policy makers,” said University of California at Berkeley Professor James Wilcox, writing as a San Francisco Fed visiting scholar in 2008.

A 1993 Minneapolis Fed report by Jean Kinsey, now a professor emeritus at the University of Minnesota, concluded confidence is “like having a mild case of the common cold. You can’t afford to ignore it, yet it doesn’t seem to change things very much.”

The Federal Open Market Committee is meeting Nov. 1-2 and may consider additional stimulus to address persistently high unemployment. Policy makers said during their September meeting that confidence at “historically low levels” was among the “factors likely to weigh on household spending,” according to the minutes.

Liz McDermott, 46, who runs a high-end interior decorating company in Atlanta, says even though she’s been unsettled by stock-market swings, government budget talks and the European bank crisis, she continues to splurge from time to time.

$3,000 Slip-Ons

She spent $3,000 in September on a pair of Manolo Blahnik alligator slip-on shoes at Neiman Marcus in her home town, about $2,000 on a bronze silk Ralph Lauren pant suit at the designer’s Madison Avenue store in New York and about $6,000 on four dresses at Michael Kors, also in Manhattan.

“In 2008 I stopped spending and went under the radar,” McDermott said. “Now I think we have all come to terms with the economy and we understand our limitations. We are feeling more comfortable in our skin.”

Confidence measures provide less optimism. The Bloomberg Consumer Comfort Index for the week ended Oct. 23 fell to the lowest in a month, and 95 percent of survey respondents had a negative opinion about the economy, the worst since April 2009.

The New York-based Conference Board’s sentiment index fell in October to the lowest point since March 2009. The Thomson Reuters/University of Michigan final gauge of consumer expectations for six months from now was near its lowest level since May 1980.

Wealthy People

Wealthy people who do give their opinions are mostly more upbeat about the economy. U.S. households making at least $50,000 averaged more than 50 percent higher confidence in the past three months than those making $15,000 to $24,999, according to Conference Board data.

While the decline in the broader gauge hasn’t been in sync with stock prices or falling unemployment claims, it does fit with a “plunge in confidence in government policy,” ISI said in an Oct. 26 report. All three sentiment measures dropped in August, following protracted wrangling between President Barack Obama and Congress over the debt ceiling.

Confidence has been “heavily influenced by political conditions in Washington,” said Ross DeVol, chief research officer for the Milken Institute in Santa Monica, California, which published a September report on confidence titled “Watch What I Do, Not What I Say.” When consumers are asked by pollsters about spending plans or the current or future economy, their answers may be swayed by their anger, he said.

‘Definitely Disturbing’

The events this summer “were definitely disturbing to anyone watching the news,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who specialized in researching household finances at the Fed from 1995 to 2000. “Concerns about the long-run deficit picture or how the U.S. fiscal situation is going to get resolved are real and valid. But they are not the types of issues that make a consumer decide not to buy a shirt this weekend.”

“When the fundamental drivers of spending are turning in one direction and looking better, those are much more important to focus on than the confidence surveys,” said Maki, citing falling gasoline prices and greater availability of Japanese autos after supplies were disrupted by the earthquake and tsunami.

Barclays, the most accurate forecaster of consumption the past quarter, is predicting 2.5 percent spending growth in the fourth quarter.

Faltering Spending Ahead

Some economists say they worry consumer pessimism may presage faltering spending ahead.

“We dodged a bullet in the third quarter,” said Robert Dye, chief economist at Comerica Inc. in Dallas, who correctly forecast the rise in third-quarter GDP. “My concern is that the pace of consumer spending is not sustainable. Consumers are constrained by weak wage incomes, and they’re not going to drive their savings rate down to zero.”

While sentiment “is volatile and has little predictive power,” consumers may turn out to be perceptive if they are worried about the European bank crisis, which is “a huge cloud over the global economy” said Stanford University economist Robert Hall, who leads the National Bureau of Economic Research panel that officially determines the start and end dates for U.S. recessions.

Consumer-goods manufacturers and retailers are struggling to make sense of the low level of sentiment.

‘Conflicting Tensions’

“We’ve got these conflicting tensions out there,” Newell Rubbermaid Inc. Chief Executive Officer Michael Polk said during a September meeting with investors in the Atlanta-based maker of Rubbermaid household products. “I didn’t love the consumer- confidence numbers,” even though “I felt like the retail numbers were pretty good.”

Coach Chief Executive Officer Lew Frankfort, in an Oct. 25 call with investors, said consumers are “cautious and concerned,” although, unlike 2008 and 2009, “there isn’t a feeling that the bottom is going to fall out.” College graduates, the company’s target market, “are doing a lot better than America overall,” he said.

While the unemployment rate has been stuck near 9 percent or higher for 30 consecutive months, the jobless rate for earners with at least a bachelor’s degree was 4.2 percent in September, compared with 14 percent for people without a high- school diploma.

The U.S. has a “bifurcated recovery,” Steven Burd, chief executive officer of grocery chain Safeway Inc. said in a conference call with investors Oct. 13. “If you’re comfortable and are on the high-income stable side of the equation,” then “you’re back to buying luxury items” and “high-end wines.” Everyone else is “really careful about how they spend.”

--With assistance from Sho Chandra in Washington. Editors: Melinda Grenier, Daniel Moss

-0- Oct/31/2011 16:59 GMT

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Robin Ajello at rajello@bloomberg.net


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