Posts Tagged ‘consumer spending’

Spending Rises as Savings Fall

Monday, November 7th, 2011

Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew.  Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce.  The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent.  That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.

Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene.  At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy.  Consumer spending is perceived as a critical economic component,  and is often cited as representing 70 percent of the nation’s GDP.

The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring.  Unless paychecks grow, Americans may not be able to continue their spending sprees.  “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom.  “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”

Fed policymakers are considering options for additional monetary easing even as the economy improves.  Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter.  “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”

“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote.  Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index.  The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.

“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.

According to The Hill, “Purchases of new and used cars drove spending.  Clothing sales rose 1.1 percent.  Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.

Bernanke: No QE3

Wednesday, October 5th, 2011

Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy.  Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank.  Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years.  He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.

 Bernanke said that he expected inflation to remain at or below two percent.  Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.”  He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.

“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.  We discussed the relative merits and costs of such tools at our August meeting.  We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said.  He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low.  “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”

As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported.  The revision was expected and primarily due to weaker exports.  In more positive news, private spending and investment in April through June were slightly higher than initially estimated.  The GDP grew by an annual rate of just 0.4 percent in the 1st quarter.  The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.

“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said.  “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery.  Although important problems certainly exist,  the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”

“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management.  Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.

Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium.  “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”  Bernanke implied that a return to economic prosperity is at stake.  “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said.  The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.” 

Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time.  “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said.  “Investors will eventually see the positives.”

July Jobs Numbers Disappoint

Monday, October 3rd, 2011

ADP, a leading payroll services company, is reporting that private companies added 114,000 jobs in July.  Many analysts had projected an increase in hiring from June, but it is not likely that the unemployment rate will decline even if job growth rose sharply.  ADP’s forecasts are frequently used to measure how the labor economy is performing, but the firm has had its share of missteps, with some estimates on target and others varying sharply from actual government-issued data.  In June, ADP projected that more than 140,000 jobs were added.  The official government report showed that the labor economy had experienced anemic growth during the month, with a net total of only 18,000 jobs created.  Many economists and industry believe that private employers likely added more jobs than previously projected during July.

Not all the news was good, however. Employers announced 66,414 planned layoffs in July, an increase of 60.3 percent over the 41,432 announced in June, according to a report from consultants Challenger, Gray & Christmas, Inc.

Any gain or loss in jobs above 100,000 is considered statistically noteworthy by economists.  Expectations were rather low, however, given the recent bad news about GDP, consumer spending and manufacturing recently.  “We still expect that actual payrolls may have risen by around 50,000 in July,” according to Capital Economics.  “That would be better than the previous two months, but hardly reason for cheer.”  “This pace of job creation usually implies a steady unemployment rate,” according to ADP’s employment report.  Capital Economics said that the latest job gains would not reduce the unemployment rate.  “We are in a process of discovery over whether the slowdown we have seen since March in the U.S. is over and we are entering a new phase of faster growth or that we are in a slump,” said Francisco Torralba, economist at Morningstar Investment Management.

Recently released Institute of Supply Management (ISM) numbers indicate an economy that continues to move barely at a snail’s pace.  The non-manufacturing ISM report showed expanding business activity, new orders and employment, but at a slowing pace.  Planned layoffs reached a 16-month high while the private sector added 114,000 jobs in June, most of them in the small business and the services sector.  “Today’s report shows modest job creation for the month of July at a rate of half what is needed for meaningful employment and economic recovery,” said Gary C. Butler, Chief Executive Officer of ADP. Approximately half of June’s private sector job additions came from small business, which added 58,000 employees, and medium businesses (+47,000).  These statistics mesh with the Challenger, Gray & Christmas job-cuts report, which showed planned layoffs hitting a 16-month high on a “sudden and unexpected burst” in downsizing by large companies.  Merck, Borders, Cisco, Lockheed Martin, and Boston Scientific announced plans to cut 38,000 jobs in July, 58 percent of the 66,414 announced.   According to Dave Rosenberg, who is viewed by many as a perma-bear, it will be really hard for a self-sustaining recovery to pick up.  “The overhang of excessive debt burdens is still with us today and the problem with the government stimulus programs that were put into place is that they were not designed properly; the multiplier impacts never did kick in,” said Rosenberg. “So we can’t ‘grow’ our way out.  Now government sectors in nearly every jurisdiction are tightening their fiscal belts.  Companies and banks retain their extreme stash of cash, if we dare suggest, because they see the economic environment that we do and want to survive the next downturn.”

In the meantime, 400,000 Americans filed for first time unemployment claims in the last week of July, according to the Department of Labor.  Coupled with a revision of initial claims in the previous week to 401,000, the latest update means claims have yet to dip below the 400,000 mark for 17 weeks.

Writing for The Hill, Vicki Needham says that “Economists say these figures are in line with the economy’s slowing expansion and are expecting growth to accelerate through the second half of the year as temporary factors such as high gas prices fade.  While companies aren’t hiring, consumers are being cautious with their money, spending less for the first time in 20 months.  Consumer spending rose only 0.1 percent in the 2nd quarter and households tucked away more savings.”

High Gas Prices Sending Americans to Their Computers to Shop

Tuesday, May 17th, 2011

Online shopping grew at its fastest pace in nearly four years in April as soaring fuel prices sent Americans to their computers instead of the malls to shop on the internet instead, according to MasterCard Advisors.  Consumers spent $13.8 billion online in April, a 19.2 per cent increase over the same month of 2010, according to the SpendingPulse survey, which is based on spending using MasterCard credit cards and estimates of other forms of payment.  Mike Berry, MasterCard Advisors’ director of industry research, said “We’ve started to see demand distortion, with people pumping fewer gallons and driving less.” reported sales had increased as much as 45 percent, while eBay reported a 10 percent rise.

In general, April sales trends are mixed, with some sectors showing continued year-over-year growth.  Others are flat or even negative, according to the report, which tracks sales across all payment methods.  A late Easter, which shifted some sales from March into April, may skew interpretations, although data suggests that high gasoline prices are impacting consumer behavior.  April marked the sixth straight month of double-digit growth in online shopping, according to Berry.  Online shopping has risen from 0.6 percent of all retail spending at the end of 1999 to 4.3 percent in the 4th quarter of last year, according to Census Bureau statistics.

We can expect consumers to make fewer shopping trips,  especially on weekends, and this may contribute to an ever stronger growth for e-commerce,” says Michael McNamara, vice president, research and analysis for SpendingPulse.  Several retail sectors saw online sale increases during April.  For example, online shoe sales rose 20 percent compared with 2010.  Women’s clothing rose by 15 percent, the second consecutive month to record that large an increase.  By comparison, clothing sales in actual stores rose 10.4 percent.  Consumer electronics purchased online grew 9.1 percent, for the eighth consecutive month of growth.  Electronics and appliance sales, including brick and mortar purchases, declined 1.8 percent in April.

Referring to continually rising gas prices, McNamara said,  “Our experience over the past several years suggests that this can have a variety of repercussions for retail.  First, we can expect consumers to make fewer shopping trips, especially on weekends, and this may contribute to an ever stronger growth for e-commerce.  Fewer miles driven also reduces demand for auto parts and services.  Finally, casual dining restaurants can be negatively impacted.”

Surprisingly demand also hasn’t yet been hurt by the sharp rise in gasoline prices brought on by the uprisings across the Middle East, according to Berry.  Still, he warns the trend bears watching as he expects that spending levels are only just starting to see the impact of soaring gas prices.  “We haven’t reached that point yet, but it is something to keep an eye on,” he said.

Increased Consumer Spending Lifts U.S. 2010 GDP

Monday, February 7th, 2011

road-sign-blogThe United States’ 2010 GDP soared at an annualized rate of 3.2 percent, as consumer spending rose by the greatest levels in four years.   “The consumer really drove the economy in the 4th quarter,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.  “The economy has moved beyond recovery to a stable state of growth.”  For all of 2010, the economy expanded 2.9 percent — the biggest one-year jump in five years — after contracting 2.6 percent in 2009.  The volume of all goods and services produced climbed to $13.38 trillion, for the first time surpassing the pre-recession peak reached in the 4th quarter of 2007.  Tiffany & Co. saw a significant increase in the sale of fine jewelry.  Apple reported record 4th quarter sales as consumers bought 7.73 million iPads as holiday gifts.  Ford Motor Company’s sales have been so good that the automaker plans to add an additional 7,000 manufacturing jobs over the next two years.  The automaker, which did not undergo bankruptcy, did lay off some salaried employees in 2008 as part of a restructuring in the face of slumping sales.

Exports also helped boost the American economy which should boost job creation over the next several years.  “The U.S. is expected to be one of the fastest growing developed countries in 2011, largely reflecting the contrast of the ongoing stimulus with other countries, such as the U.K. and other heavily indebted European nations, where austerity measures designed to reduce deficits are stifling domestic demand,” said Chris Williamson, chief economist at Markit, a London-based research firm.  “The acceleration of the U.S. GDP in the 4th quarter, and the changing composition of growth, raises hope that the economic recovery will move into a more self-sustaining phase in 2011 and generate sufficient jobs to reduce unemployment.”

Even the Federal Reserve, which renewed its commitment earlier this week to buying $600 billion in government bonds, agrees that the report shows the economy ended 2010 with moderate strength and breadth, but not enough to bring down the 9.4 percent unemployment rate anytime soon.  Personal consumption spending contributed slightly more than three percent to 4th quarter growth.  That is in line with retailers’ reports showing a respectable holiday shopping season.   Whether that level of spending holds up remains to be seen.  Many retailers remain cautious in their forecasts and report that consumers are still bargain-hunting.  As gasoline prices rise, disposable income may be limited.

Alter Now does see it as important to note the correlation with an overall increase in consumer credit debt in December, the first spike since 2008.  According to the Fed, overall consumer credit debt rose by 6.1 billion, or 3.0%, to $2.41 trillion while revolving credit debt (primarily from credit cards) rose by $2.3 billion (3.5%) to $800.5 billion. No revolving credit rose by $3.8 billion, or 2.8%, to $1.61 trillion.  While the spike in GDP is good news, let us remember that it is still being driven by deficit spending.

Compare the U.S. GDP with that of other nations last year and it’s clear who is winning.  China, for example, is expected to report an 8.5 percent jump in its GDP, not unexpected in the world’s fastest growing economy.  Japan’s real GDP was 3.9 percent higher in annualized terms for the 3rd quarter, beating estimates for a 2.5 percent rise for the year.

In the U.K., the economy shrank by 0.5 percent in the 4th quarter, compared with a 0.7 percent increase in the 3rd quarter.   By contrast, the nation with Europe’s largest economy – Germany – recorded a 3.6 percent growth rate in its GDP in 2010. 

Under Water Homeowners Slow Consumer Spending

Wednesday, November 17th, 2010

Consumer spending is down as under water homeowners struggle to pay their mortgages.  Although millions of Americans are paying their under water mortgages on time – sometimes with difficulty — it still could prove to be a source of trouble.  Because home prices are stagnant, many owners are using their hard-earned dollars to pay the mortgage and less on consumer spending.  In the long term, that is not encouraging news for economic growth.  With an estimated 15 million American homeowners under water, approximately 7.8 million owe at least 25 percent more than their homes were worth in the 1st quarter of 2010, according to Moody’s Analytics.

“At the root it’s ‘the’ problem,” said Mark Zandi, Moody’s chief economist. “If you’re going to put your finger on the one thing that’s gotten us into this fiasco, it’s the fact that millions of homeowners are under water on their homes.”  Consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund big-ticket purchases. In a sluggish economy, it’s not difficult to push an under water mortgage into default.  “When you’re under water and you have some kind of hit to your income or some kind of unintended expense, that’s when you default.  And so now we’ve got this noxious mix of millions of people under water and unemployment,” Zandi said.

Because under water homeowners owe so much, they can’t refinance or get home equity loans that could be used to finance major remodeling projects.  A case in point is Heather Hines and her husband, Santa Rosa, CA, residents who owe $415,000 on the house they purchased for $430,000 in 2004.  The county recently appraised the house at $246,000, a lower figure than just one year ago.  Although the Hines’ house needs a new roof, they have put off replacing it because their mortgage payments eat up too much of their income.  “It’s hard to think of making that investment when you’re hundreds of thousands under water,” she said.  “It just feels hopeless.  What are we supposed to do?  It feels like we’re never going to see any equity in our home.”

Cheer Down: 1st Quarter GDP Revised Slightly

Thursday, June 17th, 2010

1st quarter GDP growth downgraded to just three percent from original 3.2 percent estimate.  As George Harrison said in his 1989 song, “Cheer down.”  In a move that surprised many economists, GDP growth for the 1st quarter of 2010 has been revised slightly downward – from 3.2 percent to three percent – according to the Bureau of Economic Analysis.  Even with the downward revision, the 1st quarter was the second highest quarterly growth reported since late 2007 when the Great Recession began.

Writing in The Atlantic, Daniel Indiviglio notes that “The revision was caused almost entirely by the personal consumption expenditures portion, i.e., consumer spending.  Even though this got a lot better in the 1st quarter, it didn’t improve as much as originally thought.  It was responsible for 2.42 percent of the three percent growth.  The prior estimate reported a 2.55 percent contribution.  That 0.13 percent difference is responsible for the vast majority of the 0.2 percent revised drop.”  Spending on services – housing, utilities, food and accommodations — during the 1st quarter was overestimated in the original GDP report.

According to Indiviglio, “Of course, 0.2 percent isn’t much.  But it is a little disappointing where most of this revision came from.  Spending needs to drive the recovery to create jobs.  It’s also unfortunate that restaurants and travel was one of the most downwardly revised components; spending on these non-necessities is also an indicator that consumers are feeling much more comfortable opening their wallets.  This component, and spending overall, still showed a healthy increase compared to 2009, but these revisions make their progress a little less impressive.”

Trade estimates were revised upward to $27.3 billion from $22 billion.  At the same time, imports rose to $47.6 billion from $41 billion in the original estimate.  “So the net result is mostly a wash:  the two revisions approximately cancel each other out.  But it is good to see more exports than originally anticipated,” Indiviglio concludes.

Chinese Companies Face Branding Dilemma

Wednesday, August 5th, 2009

Over the last 30 years, China has become the world’s factory floor, offering a massive and highly mobile workforce, fast turnarounds and low production costs.  The “Made in China” label can be found on virtually any product sold across the globe, from shoes and clothing to power plant components and process control systems.  Even products labeled “Made in USA” — such as medication — are frequently born of Chinese-made components.

Most Americans are now well-acquainted with Chinese-made products, for better or for worse.  Yet how many Americans can name a single Chinese brand?  Lenovo might come to mind, or perhaps Tsingtao, one of China’s favorite libations.  But any list of the top global brands is invariably devoid of Chinese names.  How is it that a country of 1.3 billion people with the world’s third-largest economy has not produced any true international brands?

Newsweek offers up a few possible explanations. Their recent article on China’s branding dilemma focuses on Huawei, one of the world’s largest electronics and telecommunications firms and “the best company you’ve never heard of”.  Huawei,20090202_made_in_china_label_18 founded in 1988, is so substantial that they are “poised to overtake Nokia Siemens as the world’s second-largest maker of telecom hardware, after Ericsson.”  In fact, “one out of six people on the planet use Huawei hardware”, but most consumers outside of China can barely pronounce the name, let alone recognize the company’s products.  Huawei’s problem?  According to Newsweek, the firm sells few products directly to consumers, does not engage the public, and spends little effort or capital on marketing.

Meanwhile, the branding challenge appears to be systemic in China.  Newsweek names four key forces that are preventing Chinese brands from emerging on the world stage:  “cutthroat domestic competition”; tough cost pressures from foreign brands; “weak protection for intellectual-property rights”; and, of course, a bad reputation for quality after the perpetual product recalls and safety violations.  After all, it was Chinese-made products that helped familiarize the average consumer with melamine in the wake of the massive Chinese milk scandal.

Branding remains an unfamiliar concept in China, so Chinese firms attempting to sell to the international consumer face an uphill battle.  Chinese firms expend quite a bit of energy copying foreign brands rather than investing in innovation.  Many of China’s major companies grew using technology or branding “borrowed” from established foreign multinationals.  Of more consequence, the Newsweek article fails to point out Huawei itself allegedly stole quite a bit of Cisco Systems’ source code.  Cisco filed suit against Huawei  in 2003 for IP infringement, a case that was settled when Huawei agreed to alter its product line.

Already, there is a major push in China towards value-added industry and innovation.  After all, China can’t rely on cheap exports forever, especially when faced with the decrease in consumer spending in traditional export markets.  As such, the branding dilemma is likely to play a major role in debates about the future of the Chinese economy.  China’s success or failure at creating international brands will have huge repercussions for the global economy.

Richard Gould is AlterNow’s China correspondent.  He is manager in the Guangzhou office of CBI Consulting, Ltd.,
Investigations, and Brand Protection in Greater China. which also has offices in Shanghai and Taipei, Taiwan.  CBI is a leading provider of Business & Competitive Intelligence,

Bernanke Sees Some Light at the End of a Long Tunnel

Friday, May 8th, 2009

Encouraging data on home and auto sales, homebuilding and consumer spending is seen by Federal Reserve Chairman Ben Bernanke as “tentative signs” that the recession may be moderating.  Still, he cautions that lasting recovery depends on the government’s success in stabilizing the reeling financial markets and unfreezing credit.captphoto_1241771944325-6-02

In remarks to faculty and students at Morehouse College in Atlanta, Bernanke said “Recently, we have seen tentative signs that the sharp decline in economic activity may be slowing.  A leveling out of economic activity is the first step toward recovery.  To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Analysts expect the economy to shrink between two and 2 ½ percent during the second quarter of 2009, a better showing than the 6.3 percent contraction reported for the fourth quarter of 2008.  Although numbers for the first three months of 2009 will not be available until the end of April, some economists believe it will be in the four or five percent range – or perhaps higher.

“The current crisis has been one of the most difficult financial and economic episodes in modern history,” according to Bernanke.

How Will President Obama Impact Commercial Real Estate? Part 2

Monday, December 22nd, 2008

So what to make of President-Elect Obama’s progressive economic policies?  What his critics miss are some of the most intriguing features of his plan — providing companies with tax credits for hiring new employees; raising the investment expensing limit for small businesses; eliminating the capital gains rate for investing in small businesses; and the massive infrastructure rebuilding plans to fix roads, bridges and schools.  The last initiative has the potential to create millions of new jobs for the construction trades.

Although it will take time, we believe that the incoming president’s stimulus plans are visionary and ultimately will succeed.  In time, these progressive programs will lead to a wealthier middle class, increased consumer spending and overall economic growth.