Is Consumer Spending Really Surging?
There has been a plethora of articles lately on the "massive" increase in shopping during the "Black Friday" rush. While the current increase in spending is certainly supportive of the economy currently we need to take a pause and keep it in perspective. Only in this manner can we determine what the economy is going to ultimately look like in the coming quarters ahead. Furthermore, this is particularly important if you are long retail oriented stocks in your portfolio as "same store sales" figures will impact the value of the underlying stock price if they come in disappointing. One thing that we already know from the retail sales number in the 3rd quarter is that the bulk of the expenditures were not on discretionary purchases but rather utilities and medical bills. Furthermore, it also came at the expense of a massive draw down in the personal savings rate - something we will cover more in just a moment.
The move by retailers to back up "Black Friday" into "Turkey Thursday" afternoon played out brilliantly adding roughly 25% to the total sales that used to be done in a normal shopping day. The comparisons to historical trends in skewed by the addition of more than a full shopping day in some cases to post higher numbers. However, even with the extension of the shopping day, total chain store sales only came in +3.2% YoY in November, which was light versus consensus expectations and far slower than the 5.5% pace of a year ago. Furthermore, and most importantly, while volumes may have been blown out retailers cannibalized their margins with the widespread promotional activity and extremely heavy discounting with some items sold at negative margins.
So, while mainstream media was celebrating "record" black Friday sales, disregarding the massive extension in store hours, the number of channels that were taking on negative margins is very disturbing as "gimmicks" like this only serve to drag forward future consumption. In fact Reuters reported that: "more than a third of U.S. shoppers are already done with most of their holiday shopping, a survey showed on Monday, signaling that retailers need to offer bigger incentives to win sales in the few weeks before Christmas... About 32 percent of people surveyed by America's Research Group said they finished a majority of their Christmas shopping in November. Last month included Black Friday, the day after Thanksgiving when stores pulled out all the stops on discounts to woo shoppers during their biggest season of the year. More than 6 percent completed most of their holiday shopping in the first weekend of December."
This may also be the reason for the sharp drop in the Gallup consumer spending survey to 70 in the last week after a surge to 83 during the "Black Friday" week from 64 the week before. In other words the remainder of the holiday shopping season will have to be driven by continued promotions, discounting and "gimmicks" if they expect the remaining 2/3rds of shoppers to carry the balance of the retail season. This doesn't bode well for retail stocks in the coming months as profitability is reduced.
Furthermore, you will note in the Gallup consumer spending survey chart that spending "outside of automobiles and normal household bills" has remained anemic at best since the end of the financial crisis. It also points out the fact that while the 3rd Quarter release of GDP, which rebounded due to the heavy reliance on Personal Consumption Expenditures, was driven by purchases of "necessities" as once those are stripped out spending discretionary items declined. This doesn't bode well for current lofty estimates of sharp rises in 4th Quarter GDP.
This is particularly worrisome come 1st Quarter of 2012 as I would expect a sharp consumer pullback come January when the bills start to come due. This could be exacerbated if we see gas prices start to play catch up with oil prices (see yesterday's post) or if December 17th comes and goes and Congress has recessed without extending last year's tax goodies into 2012. A rise in gasoline prices combined with a reduction of bring home pay as payroll taxes increase won't play well with a consumer that is already pinched financially.
Maybe that is why that the "hot" seller this year was not the latest "Tickle Me Elmo" but hand guns as recently noted by David Rosenberg: "a record 32% YoY pace (to 129,166 — based on FBI background checks)." So, either we are about to attacked by a wave of Zombies or bank tellers, gas station attendants and convenience stores may want to beef of security when those credit card bills come due.
This all leads us back to the draw down in the personal savings rate. When you consider that personal incomes have declined over the last two quarters along with the rate of personal savings there is little wiggle room for consumers with the budget. Therefore, with oil prices flirting with the century mark, up from $80ish in Q3, any increase in living costs through higher food and energy prices is going to hit consumer quickly. That becomes exacerbated if there is an increase in payroll taxes, reducing take home pay, if Congress fails to extend tax breaks into 2012. Be that as it may we have seen this story play out just prior to the last two recessions as consumer spending rose at the expense of the personal savings rate. With less income coming in combined with low levels of savings; any potential disruption to an already weak economic system could quickly crush consumption and drag economic activity. Furthermore, the reality of consumer spending could be far different than the current estimates - therefore, pay attention particularly to the consumer discretionary sector of the market as it will be most affected by any potential shortfall.