…No, They're Splurging Again

10/01/2009 12:00 pm EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, begs to differ with Shulman, saying there are new signs of life in the US consumer.

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.

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.

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. By the end of August, retailers were beating analysts' earnings expectations by 5.1%, on average. That's well above the ten-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%.

Historically in downturns, changes in consumer spending track about two to three 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%.

So while we're supposed to be feeling hard times and "shopping in our closets," we see the opposite. Analysts cite three reasons:

1. Despite rising unemployment, most Americans still have jobs and regular incomes. "As bad as the news about the economy is, [most] Americans are still employed full time, so there is money to be spent," says Charles Rotblut, an analyst at Zacks Investment Research.

2. Even in hard times, we're willing to open up our wallets for deals and pay extra for quality. Sales improved at Lululemon Athletica (Nasdaq: LULU) 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.

3.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.

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.

To feel more confident (and keep spending), consumers will need to see unemployment come down. But consumer demand feeds itself.
 
"We suspect after a couple quarters of renewed real GDP growth, most will be surprised by a revival in the old 'spendy culture' of the US consumer," says Paulsen, at Wells Fargo.

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