What consumer-spending slowdown?
Published: May 12, 2006 7:56 p.m. ET
Some think the consumer hasn't run out of steam yet
CHICAGO (MarketWatch) -- Colleen McGovern says she has sticker shock every time she fills the tank of her Dodge Caravan.
"It's costing close to $50 -- it's outrageous," the budget-conscious mother of four said. "And all I'm doing is driving the kids around and going to work. It's not like I'm doing any recreational driving at all."
The Chicago native admits, however, that although money in her household is quite tight, higher prices at the pump aren't shifting her spending patterns. At least not yet.
"It probably should be right now," she added. "If prices keep on going up, I guess it would eventually."
But when might that be? What is the breaking point when consumers finally pull in the spending reins?
A stinging report Friday from the University of Michigan found that surging gasoline prices were taking a huge toll on consumer sentiment. The survey's current-conditions index, which measures consumers' attitudes about their finances and the economy, dived 13 points -- its deepest monthly decline ever.
In fact, more consumers remarked about high gas prices than at any time since the survey began more than 50 years ago. See full story.
That, coupled with Thursday's weak retail-sales results from the Commerce Department and Wednesday's hike in interest rates, suggests that the time for a consumer-spending slowdown is now. Indeed, economy watchers and even the Federal Reserve are now worried that gas prices are putting the brakes on consumer spending right now for a noticeable slowdown in the second half.
"At some point, the destructive nature of these higher prices will mean there's less discretionary income," said Art Hogan, chief market analyst at Jefferies & Co.
The thinking a year ago was that $3 for a gallon of gas would be "it," but Hogan conceded that he's surprised the actual consumer-spending reaction has been mostly benign. "If we haven't gotten to that tipping point yet, we're getting there."
If Thursday and Friday's market meltdowns are any indication, Hogan could be right.
Not everyone is convinced, though. "It's much ado about nothing," said Michael Niemira, chief economist at the International Council of Shopping Centers, of all the spending-slowdown talk.
"Consumers have been telling us they have a little less in discretionary spending, but it's been extremely difficult to find any retail category where there's been any major impact because of it," he added.
There have been blips along the way, but that's to be expected. Overall, sales at the nation's largest chain stores were surprisingly strong in April, and Niemira reported that they're on track for a similarly good performance in May.
'The thing is that you can be right on the [retail] story, but more often than not, you're wrong on the timing.'
Michael Niemira, International Council of Shopping Centers
"The year-over-year numbers are up 7.4% -- that's still quite strong," he said.
Consider too that gross domestic-product growth in the first quarter clocked a 4.8% gain, and on Friday economists were betting that it would be revised higher to 6% on strong exports.
"That has to slow dramatically, and I don't think it will," Niemira predicted. He's forecasting a 4.5% increase in chain-store sales for the year, which is robust growth by anyone's standards.
Covering the money
The prevailing attitude is that slightly better wages and more people working are offsetting the damage higher oil prices might otherwise be causing. As long as that holds up, consumer spending will too.
Nevertheless, job watcher John Challenger, for one, thinks that the biggest risk to job growth in the economy right now is a slowdown in consumer spending, not the other way around.
At about 4.7% unemployment, the United States is nearing what is considered "full employment" -- which generally means about 4.5% of the population is jobless, mostly because they want to be.
Then there's the threatening bursting in housing that could knock down the house of cards. Many economy watchers have been anticipating that for some time, and believe that it will come to bear in the second quarter. But a vocal handful don't believe that fewer new-home sales or even depreciation in house values will be a devastating blow to consumers.
"Even if your home price decreases marginally, you don't really notice it if you're living in it," said Donald Soares, principal of Capgemini's Americas consumer group.
Besides, added Richard DeKaser, National City Bank's chief economist, people don't think of their homes as cash cows anymore. There's also the tax deduction on the mortgage that makes taking on a bigger debt load easier to swallow.
"Psychologically, people aren't banking on their houses as they have in the past," he said.
While DeKaser doesn't believe a full retrenchment is in the works, he argued the notion that higher gas prices will hurt spending is ridiculous. By his calculations, it already has -- we just couldn't see it.
"I think these rising energy prices have been problematic from the start, but until recently they've been cloaked by other favorable developments," he said. Among them: the federal tax cuts and refund checks, as well as the wealth created through stock-market gains and mortgage refinancing.
Cloudy silver lining
Retail analysts have differing views on what turn the consumer might take. Richard Bernstein, chief investment strategist at Merrill Lynch, told his retail team recently that he believes a weakening dollar will conspire with a moderating housing market to limit consumer spending.
But over at Citigroup, retailing analysts said in a report late last week that the consumer is doing just fine, thanks.
"Housing excesses and high oil prices have been dark clouds over the U.S. consumer in recent months and have become easy targets for those who want to justify a more bearish stance on retail stocks," they wrote.
"However, we believe the U.S. consumer remains on more solid footing than many investors believe," they added.
Investors will get a chance to hear what retailers themselves think next week when many of the largest chain stores, such as Wal-Mart Stores Inc. WMT, -0.81%, Target Corp. TGT, +0.52%, Home Depot Inc. HD, +1.35% and Nordstrom Inc. JWN, -0.37%, among others, report their first-quarter results and offer up a view for the second quarter and beyond.
To be sure, there will be some belt-tightening at some time. "We're going to see that slowdown," said ICSC's Niemira. "It makes perfect sense.
"The thing is that you can be right on the story, but more often than not, you're wrong on the timing."
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WMT
JWN
Walmart Inc. U.S.: NYSE: WMT
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High $116.30
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Target Corp. U.S.: NYSE: TGT
Market Cap 59.2B
Home Depot Inc. U.S.: NYSE: HD
Nordstrom Inc. U.S.: NYSE: JWN