The Consumer Will Come Back

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.