2010 Consumer Spending Forecast

Jason Stipp: I'm Jason Stipp for Morningstar. The government reported retail
sales for June on Wednesday and the numbers were down 0.5% for
the month of June. This wasn’t necessarily unexpected to
Morningstar's Bob Johnson, our Associate Director of Economic
Analysis. He's here to explain a little bit about what he had been
expecting for the report and what he's seeing in the back half of the
year for consumer spending.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Jason Stipp: So the headline number was a little bit lower than some people had
forecasted, but you wrote last week that you weren't expecting
great things out of this number. What was your take on the
headline number and how did that meet with your expectations?

Bob Johnson: It was pretty much inline with what I was thinking and the key
thing in the retail sales number to keep in mind this time. This is
the most comprehensive government report. We talked a little bit
about last week about the individual stores. This is the one. It's got
everything from gasoline, to restaurants, to retail stores in there.

So this is the most comprehensive report. It's very hard to call and
you got to be very careful about analyzing the data in that report
because there is so much in it.

Jason Stipp: One of the things in the report as well is its capturing prices, but so
if prices in some areas go down, then that's going to affect it. So
it's not really adjusted for inflation in other words?

Bob Johnson: That's correct. At the end of the month when we see the personal
consumption numbers, which are based a lot on these numbers
those will be inflation adjusted. These numbers are just kind of raw
numbers.

Jason Stipp: So let's take into it a little bit and talk about some of things that
were up, some of the things that actually showed some positive
results when you start to dig in and look in the different categories
in there. What were some of the things you saw?

Bob Johnson: Sure. I think there were a lot more categories up than down. I
mean, the autos is a big weight on this. If you take the autos out,
we were only down a tenth or so, and if you take gasoline out of
there, you're actually, in addition to the autos, we're up a tenth on
the overall set of numbers.

Jason Stipp: And gasoline a volatile one, where the prices can change a lot and
really have an effect here?

Bob Johnson: Right. They're going to have a big effect on the reported number,
but when we get to the end of the month and get the full consumer
spending report those are adjusted for inflation.

Jason Stipp: So in some of categories, what did you see that was on the positive
side?

Bob Johnson: Sure. I think you saw a lot of categories – electronics looked very
good again and it's one that we've heard about last week. In the
first quarter, it was a good strong category. This time, I think it was
also a strong category. You saw personal healthcare spending
looked pretty good in the quarter. Department stores were another
real strength, up over a percent month-to-month. That's like a 12%
increase, if you annualize the number.

So it's good to see those types of stores doing well. Apparel did
well, just kind of sometimes a discretionary item. May be the
warm weather helped a little bit, but certainly that was another
category that was up.

Jason Stipp: You checked in with some of our retail analysts for some
additional color on some of these categories, and for electronics, it
wasn't necessarily the big ticket purchases of TVs and stereos and
things like that, but there was a little bit some texture underneath
there?

Bob Johnson: It's very interesting. TV sales have not been quite as strong over
the summer here and have actually been a little bit weak. So they
were little surprised. I told them overall electronics number, but we
dug into a little bit and decided it was things like computers, the
iPads going out and a lot of the Smartphones that fall in this
electronics category. They were responsible for driving a lot of the
sales worth, which was good and actually accelerated from May to
June.

Jason Stipp: So some of those new products from Apple certainly got people
excited about certain segments within electronics, probable spread
some sales there. And there's also some interesting differentiation
on restaurants. So some restaurants did better than others and I
think restaurants give you a sense of where consumers are feeling.
It's kind of a discretionary expense. What did you see on
restaurants?

Bob Johnson: Overall, the category is up two-tenths of a percent month-to-
month, and so that only annualizes about 2.5%. So not a great
number, and our analysts tells they are seeing a real dichotomy,
some of it, what we call, casual restaurants, the T.G.I. Friday's and
whatever, that people might think of taking their families to as kind
of a treat, are actually beginning to do a little bit better.

On the other hand, the quick-service restaurants, real fast food,
burger type of joint, those sales are still suffering and the reason is
that those are tied a little bit closer to employment, because people
tend to dash out of those in between their lunch-hour period or off
from the construction site or whatever into a quick-service
restaurant and that business is still really quite weak.

Jason Stipp: So certainly quite tied to the employment market, which is still
slow to recover. So that probably explains a lot of that. Another
thing that you had mentioned that you are sort of taking out when
you are looking at these numbers was auto. So what's going on
with the auto sales and why have they been a drag on the overall
numbers?

Bob Johnson: I think we had a very good first quarter for autos and I think we
had a lot of really big promotions and financings in the first
quarter. And recall, when Toyota had all their problems, they
pulled all the stops for advertising and financing, and frankly those
numbers have been a little bit hard to match in the second quarter.

On top of it, as we alluded to in our piece last week, was that the
consumers are willing to step up for a little small bargain or a
luxury or whatever, but the really big ticket car, they really haven't
gone wild yet. And clearly, we had a decent March, and now we're
kind of backed off and we're being cautious. It's a big ticket item
and until they feel a little bit more confident, those auto sales are
going to be a little bit of a drag.

Jason Stipp: Okay. So I'm going to ask you to pull out your crystal ball here a
little bit and talk about what you are seeing for the rest of the year
on the consumer spending front. So it seems like it's been a little
rocky over the last few months and a little bit harder to get a sense
of what the actual trend is, but what you are looking at to get a
sense of where consumers might be putting their money in the
back half of the year?

Bob Johnson: Yeah. I think that overall, I'm looking for consumer spending in
the first half year to be up about 3% and I think that's probably just
about what we're going to get in the second half and maybe they
shot at just a little bit better than that. And I think consensus is that
we've peaked out and it's going to get worse in the second half.

And let me explain some of my reasons why we think we're going
to – it could be a little bit better in the second half. The savings rate
has gone up in the first half of the year. Consumers have put a little
bit more aside and I think part of it is -- maybe whether it's a fear
from the European situation being splashed on the headlines,
whether it's the market being down or whether it's the Gulf oil
situation, people clearly had more money to spend, but didn't
spend it, and I think they could choose to spend that in another
quarter.

Jason Stipp: Especially if they have some saved up, if they've banked a little bit
then they might feel like they can do some of those small luxuries
and spend a little more.

Bob Johnson: Especially as they feel more confident. Now we've had a pretty
good start to the quarter in terms of the stock market and that
certainly could help them feel a little bit about letting their purse
strings go up again. It seemed to be a little bit more correlated than
I would have thought.

Jason Stipp: Yeah certainly earnings season has started off pretty well. There is
still a lot – of course, we've just started earnings season, but if the
markets sort of holds up if earnings look a little bit better – I mean
Intel's earnings, for example, they saw some nice improvement
across the board from business to consumer. So I think maybe that
will certainly help people feel a little bit more confident?

Bob Johnson: I think certainly the first, as you warn. We don’t oversee the back
half, but certainly the first week of earnings season looks pretty
good. I mean Alcoa kicked the ball off with some pretty good
numbers and seen some little bit better demand than they had
across the world.

Then we saw the Intel numbers, as you mentioned, not only did
they report a very good and above expectation quarter, but they
also forecasted the second half was going to be strong as well and
that we were on the start of a major PC upgrade cycle. So that may
be we won't be all wedded to the consumer, but maybe the
businesses will do a little bit better too and kick in some help to
improving economy in the second half.

Jason Stipp: Certainly would be a nice trend to see kick off. So thanks for
joining me Bob and for your context on the numbers...

Bob Johnson: Great to be here.

Jason Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.