With unemployment still rising, home prices still down and credit card lenders tightening the reins, consumers should still be living close to the bone, right?
Not so much. Despite predictions of a long-term age of austerity, the latest economic and retail data show that shoppers have begun to open their wallets again.
Yes, ostentatious consumption is still passé; cheaper choices are the best-sellers at stores such as Tiffany (TIF, news, msgs) and Coach (COH, news, msgs), for example. But consumers are splurging again on little luxuries: trendy clothing, pricey jewelry, big-screen TVs, even visits to strip clubs.
And if the splurge is back, the economy can't be far behind.
Retail tea leaves
Retailers in August and September revealed these tidbits:- Little blue boxes at Tiffany containing pieces from a new "Tiffany Keys Collection" of diamond studded pendants -- priced from $150 to $15,000 -- are going out the doors in big numbers.
- New Poppy handbags at Coach -- average price, $260 -- are moving briskly.
- Stylish denim-wedge boots, thong sandals, wedge shoes and handbags by Steve Madden (SHOO, news, msgs) are flying off the shelves. So are denim vests and chunky jewelry at Chico's FAS (CHS, news, msgs).
- Men are spending more on drinks and lap dances at strip clubs.
- Consumers continue to snap up big-screen TVs, and netbooks, the little cousins of laptop computers, are hot.
If you don't believe these splurges spell a trend, consider the big-picture evidence:
- In a deepening recession we should see spending on discretionary purchases decline. That's not what we see at all. Using the Zacks Investment Research database, I recently looked at Wall Street analysts' sales estimates for all companies as of last week, compared with their estimates from 12 weeks ago. Sales estimates for the retail category, which includes Amazon.com (AMZN, news, msgs), Abercrombie & Fitch (ANF, news, msgs), Chico's FAS and Tiffany, were up 2% to 4% for this year and next. Estimates for the cosmetics and soaps group, which includes Avon Products (AVP, news, msgs), Bare Escentuals (BARE, news, msgs) and Elizabeth Arden (RDEN, news, msgs), were up 2.5% to 3.6%.
- By the end of August, which was when most retailers reported earnings, retailers were beating analysts' earnings expectations by 5.1%, on average. That's well above the 10-year quarterly average of 2.6%, notes Ken Perkins of Retail Metrics, which tracks retail sales trends. About 77% of retailers beat expectations, compared with a long-term average of 59%.
- Government data for August showed that consumer spending at bars and restaurants was up 0.65 percentage point as a share of total consumer spending. That's not huge, but in an age of austerity, this spending would be going down.
- Historically in downturns, changes in consumer spending track about 2 to 3 percentage points above jobs growth, says James Paulsen, an economist and markets strategist with Wells Fargo. Yet in the past six months consumer spending has risen slightly, while jobs have declined by 5%.
- Consumer confidence rose significantly during the summer, says James Russo, the vice president of consumer insights at Nielsen. The percentage of consumers expecting a recovery rose to 26% in July from 19% in April. Plus consumers expressed an interest in spending more on clothing, vacations, consumer electronics and takeout meals.
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1. The ranks of the employed. Despite rising unemployment, most Americans still have jobs and regular incomes. "As bad as the news about the economy is, the majority of Americans are still employed full time, so there is money to be spent," says Charles Rotblut, an analyst at Zacks.
2. We still love a bargain. Even in hard times, we're willing to open up our wallets for deals and pay extra for quality. "It's more about value than anything else," says Jeffrey Van Sinderen, an analyst at securities research firm B. Riley. "If the price of an item is higher but consumers perceive value, they are willing to pay a little more." We see this over and over right now. A $3,000 Gucci bag may be out of reach, but the Poppy bag has similar allure. So go for it. Sales improved at Lululemon Athletica (LULU, news, msgs) during the summer even without price cuts because customers respect the quality and design of its sports apparel. Analysts have upped Lululemon sales estimates for this year and next by 10% to 13% in the past 12 weeks. These two reasons explain why discretionary spending hasn't stopped. The third explains why it's picking up.
Video: Consumer confidence is on the rise
3. The rebound effect. Many people simply feel a little richer after a 50% rebound in the stock market and with all the talk about a possible recovery. Citigroup strategist Tobias M. Levkovich estimates households have regained $5.4 trillion in wealth because of the market rebound. Consider the typical Chico's FAS shopper -- as described by the company. The retailer caters to "mature" women in their 50s and up. During the market slump "she recoiled in terms of her spending when she was seeing her 401k evaporate before her eyes," says Robert Atkinson, who handles investor relations for Chico's. "A year ago she just made a beeline to whatever was on clearance." But today this customer "feels that she has probably recovered some of her personal wealth," Atkinson says. "Now she is coming in to buy what is fresh, what is new."
Simply put, we survived. We're starting to rebound. We're ready to celebrate a little. So wrap up that little splurge and put a green shoot in that cocktail.
This trend could be critical for an economy still heavily dependent on consumers. From its peak in November 2007, consumer spending has fallen 1.7%, but it still accounts for a little more than 70% of the nation's gross domestic product -- because other spending has fallen with it during the recession, says Mark Zandi of Economy.com.
Continued: Hot spots in retail