You've got to feel for American consumers -- they just don't seem to know which way to go.
Sure, they were able to suppress the powerful urge to buy during the worst moments of the Great Recession. But now the recession is over (at least technically). The values of homes and retirement portfolios are still way down, but doom doesn't feel so imminent.
So it's back to the checkout line.
Despite a troublesome summer, with its stock market swoons and debt woes in Europe, the back-to-school shopping season exceeded expectations and set the stage for a solid holiday shopping season. U.S. consumer spending is now up 4.5% from its low -- a gain of nearly $470 billion on an annual basis. That's good news for an economy that has slowed over the past few months.
We haven't returned to the bubble-era excesses of aspirational spending fueled by easy cash from mortgage equity withdrawals, but experts say shoppers are of two minds. People are still clipping coupons and chasing discounts on necessities, yet they're splurging on little luxuries such as shoes, jewelry, cosmetics and handbags.
As a result, retailers such as Family Dollar Stores (FDO, news, msgs) and Target (TGT, news, msgs) are doing well peddling cut-price necessities on the low end, while high-end outlets like Saks Fifth Avenue (SKS, news, msgs) are also prospering. On the other hand, midmarket retailers, especially Walgreen (WAG, news, msgs) and other drugstores that aren't known for cost competitiveness, are seeing traffic declines.
Citigroup analyst Deborah Weinswig calls it "the new abnormal," an odd and erratic pattern of behavior by U.S. consumers. Although many are still suffering from intense financial pressures, consumers are tired of thrift. As a result, and to the surprise of many who thought luxury retailers couldn't thrive in the post-bubble economy, shoppers are indulging again.
Saving or spending? Can't decide
You can see this happening in the economic numbers. Households are wavering between a saving-centered bunker mentality and spending-focused optimism. As a result, the savings rate has oscillated in a wide range between 2.5% and 8.2% since April 2008.High-income consumers are treating themselves despite looming tax increases, ongoing continuing stock market volatility and a very shaky high-end housing market, all of which should make them feel uneasy. And low-income shoppers are shopping as they try to forget the realities of high long-term unemployment and a record number of people using food stamps.
All of this is critically important for an economy that still depends on households opening their wallets: About 30% of U.S. gross domestic product is retail spending, with the majority being discretionary purchases. Overall, households account for more than 70% of total GDP when categories such as health care and housing are included.
Thus this new abnormal will have important repercussions not only for the health of retailers and consumer stocks in particular but for the viability of the recovery in general. Investors are showing signs of confidence: Since July 1, the Retail SPDR (XRT, news, msgs) exchange-traded fund has gained nearly 16%, compared with a 10% gain for the Dow Jones Industrial Average ($INDU).
The handoff
The story of how we got here is familiar: U.S. consumers, drunk on debt and drawing equity out of their homes, went on a buying binge during the 2000s. The savings rate plunged near zero as measures of indebtedness pushed to all-time highs. The financial crisis and Great Recession stemmed the flow of easy credit. Then the bills came due.Over the past three years, households have had to tighten their belts. Deleveraging became the operative word as debt burdens -- whether through repayment or default -- were whittled down. The savings rate jumped from 0.8% in 2005 to a high of 8.2% in summer 2009 before settling around 6% now.
Along the way, consumers slashed spending. In fact, personal-consumption expenditures actually dropped on a year-over-year basis between November 2008 and September 2009. This was the first decline in spending seen since the government started tracking the data in 1959.
That was OK for a while -- as temporary boosts from government stimulus spending, exports and inventory rebuilding bolstered the economy and powered the initial recovery. But now the macroeconomic fear is that consumers' newfound miserly ways will become permanent, dumping the recovery back into a recession.
Federal Reserve Chairman Ben Bernanke recently pointed out that a sustained economic expansion won't be possible without an uptick in consumer spending as the impact of stimulus efforts -- such as Cash for Clunkers and the recent homebuyer tax credit -- begin to fade. Although he noted this "critical handoff" appears to be under way, it's far from a done deal.
To be sure, income gains are coming in surprisingly strong given the still-too-high unemployment rate. Through July, the wages of employees and small-business owners were up nearly 3% from their March 2009 lows -- a gain of $250 billion on an annual basis. Moreover, the measure of wages posted its best year-over-year growth rate since late 2008.
Continued: Will wage gains continue?
They are selling like we are rich. LOL!
I shop I get snagged. I really feel nihilistic. LOL!