June 21, 2012 at 12:04 PM EDT
Consumer Spending: May Numbers Weren’t Very Pretty

Consumer SpendingConsumer spending remains fragile, impacting the retail sector and gross domestic product (GDP). The key drivers are employment and wealth generation from such sources as stocks and housing.

In the retail sector space, sales have been largely mixed with discounters and big-box stores faring the best as shoppers flock to Wal-Mart, Target and Costco, along with the increasingly popular dollar stores and hyper-supermarkets.

The reality is consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in the remainder of 2012. With consumer spending accounting for about 70% of the GDP growth in the U.S., it will be critical to get consumers to spend. However, the Consumer Confidence reading weakened to 64.9 in May, down from 68.7 in April and below the estimate of 69.4. In general, this lack of confidence translates into lower retail sector spending—and slowing GDP growth.

In particular, spending on big-ticket items continues to be fragile. The Durable Goods Orders gained 0.2% in April, remaining below the 0.3% estimate but ahead of the 3.7% decline in March. Ex-transportation, the reading fell 0.6% compared to the estimate calling for a one-percent gain.

In May, retail sales excluding automotives fell 0.4%, worse than the 0.3% decline in April and below the zero-percent estimate.

Job creation is the most critical variable for the retail sector. In May, a disappointing 69,000 jobs were created, well below the 150,000 estimate and the downward revised 77,000 in April. The jobless rate was 8.2%, which has been improving but still too high for a healthy economy and could strangle growth in the retail sector.

The Fed estimates the unemployment rate will hold above eight percent this year. Moreover, economists feel the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until 2013 or 2014 at the earliest.

A strong U.S. housing market is also critical for the retail sector as homeowners tend to buy new furnishings, driving up spending on big-ticket items. While we are seeing improvements in housing starts and building permits, the problem remains—home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending, thereby impacting the retail sector.

Foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 that prices steadily rise.

Jobs, consumer confidence and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

Technology will continue to be a top growth area in the long term, which I discussed in Apple & Technology Stocks Looking Like Great Investment Opportunities.”

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