The Recovery of Consumer Spending

Jason Stipp: I'm Jason Stipp for Morningstar. There's no denying that the fate of
the US consumer and the U.S. economy are closely connected, but
just how crucial is the consumer and how is he feeling today? Here
with me to offer some insights is Morningstar's Bob Johnson. He's
associate director of economic analysis. Thanks for joining me,
Bob.

Bob Johnson: Good to be here today.

Jason Stipp: So you recently described the effect of consumer spending as sort
of a whip effect on the economy. Can you explain a little bit about
what you mean by that?

Bob Johnson: Sure, it's like a giant whip or a "crack the whip" the game where
the handle of the whip is the consumer. And it actually doesn't
move very much, but at the very tip of the whip is something like
investment spending that is very, very volatile. And you might see
consumer spending go down two percent, but you might see
investment spending go down, as it did this time, as much as 30
percent. So a little move in consumer moves a lot of the other
categories even more.

Jason Stipp: So certainly because the consumer is just such a huge part of the
economy overall that you can see a little improvement there, but it
creates this sort of follow on effect on the down and on the upside
as well.

Bob Johnson: It goes up both ways and the consumer, as you say, is 70 percent,
but what it really affects is the business investment spending, and
so forth, down the other end of the whip, which really moves the
economy around.

Jason Stipp: Sure. So give us a sense, then, of how far--it seems like consumers
have been improving. Recent reports showed some improvement
there. How much farther do we have to do to get back to normal?
Have we completely recovered or do we still have some ways to
go?

Bob Johnson: Well, where we are, believe it or not, it's a hard number to believe,
and I'll break it down just a little bit. But consumer spending, in
real dollars, that is inflation adjusted, is higher than it's ever been
in U.S. history now, as of last month's report. So I think that's a
pretty amazing number. We covered the ground we lost. Now,
keep in mind it wasn't all that much ground. It was around a two
percent decline in consumer spending overall. Now we've gotten
every last drop of that back and a little.

Jason Stipp: OK. So, I think that we have seen in retail sales reports some real
spending is going on out there. Consumer wallets seem to be
opening up a little bit. I think for a lot of people, they're
wondering, "How is this happening when unemployment still
seems quite high?" We've seen some improvement there, but we're
still at elevated levels. Where is the money coming from?

Bob Johnson: Yeah, very good question. A couple places where it's not coming
from. It's not coming from debt. The consumer debt levels are
down from where they were at the worst of the recession. We've
actually spent down, so the good news is that they're not spending
it from a bunch of loans. That's the good news. It would appear
that a lot of the money is coming out of savings, gains that have
been made in the stock market. And given that some of the higher-
end stores, the Nordstroms, the Saks, and so forth, have been
particularly strong might be indicative of the fact that some of it's
coming out of savings and the stock market returns. We are up in
the 70 percent range in the market and some of that money,
inevitably, gets spent.

Jason Stipp: So we're seeing a flip side of that negative wealth effect, that we
had in the depths of the downturn, is coming back around now and
people see their portfolio levels up a little bit. They feel a bit
wealthier and perhaps that leads them to spend a little more money
than they had been spending during the downturn.

Bob Johnson: Absolutely. And I guess the other thing I'd want to say, a lot of
people are like, "Well, now the savings rate's going to go back to
the same crummy result before, and then we're going to be in the
same old problems again." I don't really think we're there. I think
when we got to five, six percent savings rate, I think that number
was high because everybody was scared, really scared and
panicked, and saved more than they really needed to, if you will.
And I think that now the number's down around three percent. So
we've kind of cut it in half, but it's still off the zero that we reached
at one point in time.

Jason Stipp: Now that we've seen a nice pop in the stock market and maybe that
wealth effect, it probably has some end to it after the market has
come up. And we also saw some stimulus last year, that helped to
spur spending in the auto area, for example. What's it going to take
to keep this engine going? Do we need to see further government
stimulus? Do we need to see further stock market gains? Or are
there more fundamental factors that will get consumers to continue
their spending trends?

Bob Johnson: I think that the next step in the puzzle is the manufacturing
component to come back, which it has. And then see them hire
more people and bring the employment number up which we're
seeing. And then that leads to more service jobs around the
periphery of the manufacturing businesses. And I think last
month's job growth of 290,000is indicative of what can happen and
if we get a few more months of that, that will put a lot more
income in the hands of consumers and I think that's going to be the
key driver in the next six months, along with more hours worked
and maybe some gains in real wages.

Jason Stipp: Last question for you. It's always nice to see some of these
assumptions play out on the ground in some anecdotal evidence.
What stories do you have from the street that indicate that we are
seeing a real recovery for the consumer?

Bob Johnson: There are two things that are going on out there. There are a lot of
things happening in the tech sector and then there's other things
happening in the restaurant sector. And those are two consumer
discretionary items where they're a little volatile and maybe extras,
so that when people spend there you know things are getting better.
In the case of restaurants, just pick a name. Most of them are doing
very well right now. If you look at Starbucks, if you want to pick
one name brand, the traffic in their stores was up in the most recent
quarter for the first time in 13 quarters. That's more than three
years.

So that's one of the signs that's going on there and you've got
everybody from Brinker doing well, Cheesecake Factory and the
mid cycle restaurants and then even on the low end, McDonald's
continues to do well and report great sales results. So that's the
restaurant side and that's discretionary and that's doing well.

On the tech side, where to start? Intel's excellent earnings this
quarter were largely driven by consumer spending. We've seen
articles that the netbooks are beginning to lose favor and
conventional notebooks that are more expensive and more highly
featured are actually selling better. Apple/Macintoshs are growing
much faster than the entire industry and yet they're two to three
times the price of other computers, on a list price. If you adjust it
for a few things it's not as drastic. But the Apples are more
expensive and people are flocking to them.

Jason Stipp: Certainly nice to see some of those positive signs. Bob, thanks for
your context and the insight on the consumer today.

Bob Johnson: Great to be here.

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