When Will Consumers Start Spending Again?

For the first time in a while, there is some good news for the U.S. consumer and for companies that rely on consumer spending. One booster is the rapid recovery in stock prices, with the Standard & Poor's 500 index jumping 47% since its low point in early March.

"Clearly, there is a wealth effect," says Keith Hembre, chief economist at First American Funds. As Americans feel wealthier, they may be more willing to spend. Though, Hembre warns, the housing market remains weak, meaning Americans' investment portfolios may look better but their real estate holdings are looking worse. "While the stock market has gone up, home prices have continued to head down," he says.

But, economists say, there are signs the broader U.S. economy is bouncing back from its sharp contraction in 2008 and early 2009. "It is increasingly looking like the recession ended in May or June," John Ryding and Conrad DeQuadros of RDQ Economics wrote in a note Aug. 3. The day before, former Federal Reserve chairman Alan Greenspan told ABC, "I'm pretty sure we've already seen the bottom."

Housing Market Stabilizing On Aug. 4, the Commerce Dept. said consumer spending rose 0.4%, after a revised 0.1% increase in May. The rise was boosted by spending on nondurable goods (anything that doesn't last five years or more), which were up 1.7% in June.

For the housing market, there is mounting evidence that conditions are stabilizing, too. Data released Aug. 4 showed U.S. pending home sales advanced 3.6% in June.

Another positive for the U.S. consumer is efforts by the federal government to stimulate spending. Ford Motor (F) said Aug. 3 that the "cash-for-clunkers" program was a big factor in its first monthly sales increase in almost two years. Ford's total sales (including fleet) rose 2% for July. The U.S. Senate is considering expanding the incentives to car buyers, a measure that Ryding and DeQuadros say could provide "a pop in consumer spending" this quarter.

Job Fears Front and CenterThe problem with all this optimism about the U.S. consumer, however, is that it runs into a depressing reality: Americans are still losing their jobs, so they have less money to spend. When it comes to the economy, "the numbers are gradually improving," notes Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN). But, "the worry is that employment will not pick up anytime soon."

Americans, worried about their job prospects, have decided they should be saving more. "And they're right," Gambera says, "because there is no forecast of real improvement in the job market any time soon."

Gary Wolfer, chief economist with Univest Wealth Management (UVSP), agrees. The unemployment rate will probably hit 10% by early 2010, he says. "I don't see those jobs coming back very quickly," Wolfer says, adding, "When jobs do come back, they're going to be totally different."

Consumer Still Retrenching The weakness in job prospects may explain why consumer discretionary stocks have been relatively weak performers recently. According to data provider Capital IQ, the financial sector is the top performer of the last three months, up 26%, followed by the materials and information-technology sectors, both up 17%. By contrast, consumer discretionary and consumer staples sectors have risen less than 12% each. "The [rally's] underpinnings are not the consumer," Wolfer says. "The American consumer is still too busy rebuilding [his or her] shattered balance sheets."

In recent earnings releases, executives at consumer-focused companies have sounded uncertain of what to expect. On the one hand, some trends have improved. CVS Caremark (CVS) Chairman and Chief Executive Thomas Ryan noted that in past quarters, pharmacy sales had slowed down. "People were splitting some of their medications and stretching out their medications," Ryan told analysts Aug. 4. "We are not seeing that now."

Walt Disney (DIS) President and Chief Executive Robert Iger told analysts July 30 that the entertainment giant "is dealing with a marketplace where there's not all that much visibility." He added, "It's a challenging marketplace and we do expect the challenge to continue."

Not Counting on Consumers Even if job losses continue, consumer spending could recover if the pace of layoffs slows, says Jerry Webman, chief economist at OppenheimerFunds (OPY). The key is that workers begin to feel more secure about their jobs. "Consumer spending stabilizes [if] people don't see as many jobs being lost around them," he says.

However, like many economists, Webman warns that there is a difference between consumer spending stabilizing and it becoming a significant economic driver. "We're not going to be accelerating our consumption the way we have over the last couple decades," Webman says.

Without a full-blown recovery in spending, it could be tough for consumer companies, especially compared to other sectors. That's why many economists and investors are looking for growth in other places—sectors like technology or drivers like export growth, emerging markets, or infrastructure spending.

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