Jason Stipp: I am Jason Stipp for Morningstar. We got some consumer-related data this week. Consumer spending was up, and consumer incomes were up, actually considerably. Here with me to talk about some of the patterns we've seen in consumer spending and incomes and where we go from here is Morningstar's Bob Johnson. He is associate director of economic analysis. Thanks for joining me, Bob.
Bob Johnson: Good to be here.
Jason Stipp: So, the first question for you. I'd like you to recap some of the patterns that we've seen in the consumer and the consumer spending since the recovery has ensued, because it seems like we've seen some changes there, and the consumer obviously is such a big part of the recovery. How has the story changed there?
Bob Johnson: Keep in mind that consumer spending actually bottomed on a monthly basis in December of 2008. So some time ago that it really did bottom out, and it came back rather nicely for a while, and then we kind of go through these pause stages and then we kind of go up again and pause again, and so it's been an up and down cycle, but the consumer has been a key driver of this recovery. Probably only exports have been having a greater impact on the recovery than the consumer.
Jason Stipp: So recently, it seems that some fears about the consumer have re- emerged or the spending has been okay. It's been mediocre, but it hasn't been as surprising as maybe what we had seen earlier in the recovery. What's behind the consumer spending patterns that we're seeing right now?
Bob Johnson: I think that what you are seeing behind that is we had some weaker incomes at the beginning of this year, and my premise has always been that consumer incomes are eventually what drive spending. Eventually, the money gets spent, maybe not the first month, not the second month, but eventually if consumers get more income, at least some of that ends up getting spent.
Jason Stipp: Okay.
Bob Johnson: And so, once you get that virtuous cycle established, it's a very good thing, and that's why I've been so bullish on the economy and why it's hard—we don’t immediately go back into the dumper again. What happens is that consumer spends a little more, then you ramp up production to meet the spending, and then they have to hire more people, and that means more income, and then more income means more production, and it gets in this virtuous cycle that's really quite hard to stop.
Jason Stipp: So given that some weaker incomes earlier in the year may have been impacting some of the results we saw recently. What are you seeing now on incomes and what does that say about what the consumer might be doing perhaps later this year?
Bob Johnson: Well, I think the right number to look at is real, that is inflation adjusted, disposable means after taxes income, and that's the best metric to look at. And just so I get them right, let me look down here, we've got 0.3% increase in March, 0.6% in April, and 0.5% in May, and those are really big numbers. I mean, keep in mind, that's a one-month jump. So, if we keep growing at that same rate, you multiply by 12 and you get something like incomes are up 5%, 6% and so—
Jason Stipp: A robust annualized rate.
Bob Johnson: Robust annualized rate that will eventually translate back, in my opinion, into more spending.
Jason Stipp: So, what kind of consumer incomes were we seeing earlier in the year compared to those numbers that you just gave us?
Bob Johnson: Well, we had a couple of months of zeroes in there earlier on. So, that's what I think showed up in some of the April and May numbers that were a little bit slower.
Jason Stipp: And you mentioned earlier talking about autos and exports and some of the things that had been driving the recovery. Where have we not seen consumer spend as much that we might start seeing them spend, if this income really kicks in and gives them the confidence to spend more?
Bob Johnson: Sure. The surprising one for me is that autos have not yet really taken off for the consumer. Autos have been a big part of this recovery, but a lot of that's been businesses taking more autos in and that's what's really driven that.
Jason Stipp: So, businesses like fleets or rental companies or—
Bob Johnson: That and just even people for their own delivery trucks have been an important factor. And the consumers have spent a little more on autos, but they really still haven't come back nearly as much as I would have thought, and so that's certainly one of the big factors that has not kicked in yet.
On the other hand, some recreational vehicles and other durable categories are up pretty strongly, and durable goods in general are doing good and non-durables, are doing pretty good, but the services side has been a little slower to recover this cycle.
Jason Stipp: So it's almost like the consumers are thinking about where they are going to spend their money and maybe some of these purchases they've been putting off a little bit. Their recent incomes in the early part of the year may have played into that a little bit. But ultimately, though, some of these bigger purchases, it's just pent-up demand, do you think?
Bob Johnson: It's pent-up demand, and I think we are going to see people make them. There are things that take a little bit longer to decide on, and I think they will come back, and I think we're going to see some of that in the months ahead.
Jason Stipp: Bob, thanks so much for joining me and for your insights on the consumer.
Bob Johnson: Great, thank you.
Jason Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.