Wednesday, September 4, 2013

What’s Really Holding Back Consumer Spending?

By Sasha Cekerevac

It seems as though not a day goes by in which we don’t get new information about how weak the average American’s level of income and consumer spending really are.

According to the U.S. Department of Commerce, personal income for the month of July rose only 0.1% month over month, down from a 0.3% rise in June. Consumer spending rose only 0.1% in July from the preceding month. (Source: “Personal income and outlays, July 2013,” Bureau of Economic Analysis web site, August 30, 2013.)

Consumer spending saw a reported 0.6% increase in June from the previous month, so this 0.1% increase in July is a sign that the average American is pulling back on consumption. Even though we’ve seen relatively stable housing and automobile data, it’s quite evident that consumer spending is vulnerable.

As most of you know, consumer spending is approximately 70% of the U.S. economy. As I’ve mentioned before, without a re-acceleration in spending, the U.S. economy also cannot improve.

Frankly, July’s level of consumer spending is not a shock to me, as I’ve noted before that the underlying fundamentals of the U.S. economy are quite fragile.

It is true that both housing and the automotive sectors are doing well. However, this has been brought on through the low-interest-rate environment, not through increased levels of income.

Because incomes are not rising, Americans who are buying big-ticket items are doing so on credit, using the cheap interest rates to finance their consumer spending purchases. However, for the U.S. economy to really accelerate, we need far more participation from all sectors, not just the interest rate-sensitive segments.

S&P Retail Index NYSE Chart

Chart courtesy of

Above is a chart for the SPDR S&P Retail Index (NYSEArca/XRT) exchange-traded fund (ETF). It has essentially doubled over the past few years.

When we look at the recent data regarding consumer spending and the relatively anemic U.S. economy, and combine that with retail stocks that have done so well over the past couple of years, there’s just one question: what’s left for the stocks?

In my opinion, the risks are rising, and we will likely see a significant pullback in retail-oriented stocks. I continue to see stagnating incomes, which will leave consumer spending relatively flat. With gas prices now rising, this will take an even bigger bite out of the average American’s income, leaving less money for consumer spending on discretionary items.

Retail stocks have run far ahead of the fundamentals, as investors were hopeful that the U.S. economy would quickly rebound from the Great Recession. Recent data are clearly showing that neither the U.S. economy nor consumer spending is reaccelerating.

Whenever you are making an investment decision, always consider the risks and the rewards. Taking a look at this index of retail stocks, do you really believe that consumer spending will spike higher over the next six to 12 months? I just don’t see that occurring. Of course, if the data begins to shift, one also needs to adjust their portfolio strategy.

Until we see solid evidence that the U.S. economy is growing at a rate that’s fast enough for both incomes and jobs to accelerate, we won’t likely see consumer spending begin to reaccelerate, which leaves the potential for upside capital appreciation in these retail stocks. Until then, I would move toward the sidelines and wait for better opportunities.

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