For several weeks, a rotation has been underway in the U.S. market, with money moving away from some...
Consumers Are Still Crunched
03/11/2013 8:30 am EST
Because consumers represent so much of the economy, sentiment and spending are crucial to any recovery, and neither has returned to the level Chris Versace would like.
I am talking about the consumer’s role in the economy today with Chris Versace. Chris, welcome; thanks for coming.
Well, thanks for having me, Nancy.
So the consumer is a really big part of the economy—what, about 70%?
That’s what a lot of people say. Yes, about 70% of the domestic economy is driven by the consumer and consumer spending.
And although retail sales have improved from the bottom of the market, we’re still not seeing great growth. We are not seeing great consumer confidence, going out there and just piling on the spending, are we?
I don’t think we have, and I think we have to look at really two things. One is the health of the consumer in terms of disposable income; then, the other side is a lot of uncertainty to go as we march through 2013.
On the first side, if we look back on the job creation front, it is very tepid. We are still hovering around a 7.9% unemployment rate, but when we sift through that data a little bit, we see that earnings and disposable income have kind of flatlined. They are not really growing.
So when you look at them on an inflation-adjusted basis, you would say that consumer disposable income is really tapped out. What do I mean by that? The Fed says there’s no inflation—but you and I both know that there is, and so does everybody who is watching, because they are paying for gas.
Gas prices are starting to rebound, and I think that will happen even more so. Not only with the summer driving season several months away, but we are seeing the emerging economies and China start to expand again. That is going to drive incremental demand for oil, and that means higher gas prices, I’m afraid.
The consumer is also dealing with higher food prices as a result of the summer drought of 2012. We are seeing very low inventories for corn and wheat, and that is going to push food prices up even higher. Then, of course, we have the expiration of the payroll tax holiday...
Yeah, that’s a big bite.
Well, it is not a huge bite. It’s about 2%. For an average American, it’s about $60 a week...but in terms of disposable income each and every week, that’s a big deal.
So when we see that data and we look at some Gallup data that talks about if people are hurting or not—people are hurting, and I think a lot of investors— till don’t understand that. When we look at that, the question becomes what is the consumer going to do? They are still going to cut back.
I think casual dining is a very vulnerable sector. I think they are going to continue to eat at home, which is good for companies like McCormick’s (MKC). So the trade there would be avoid companies like Red Robin (RRGB) or Buffalo Wild Wings (BWLD)—which, by the way, is also seeing its input costs rise...again, higher food prices—and a weakening on the consumer front. So I would stick with companies like McCormick’s and others that get people to eat at home.
Right. And I guess the other thing is that debt really has not changed much in terms of decreasing...so that hurts the consumer also.
Well, that...there are two points to that, right? There is the federal debt—you’re absolutely right—has not stopped at all. In fact, it continues to creep. But that means we’ve got some looming cuts. We have the sequestration and the fear of incremental taxes which could also crimp the consumer even more.
So there are a number of reasons, I think, why the consumer continues to be feeling the pain of uncertainty.
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