Why It's a Two-Tiered RecoveryBy and
Intel (INTC) Chief Executive Officer Paul S. Otellini told investors on July 13 that he is seeing "renewed economic momentum." A day later, Yum! Brands (YUM!) Chief Financial Officer Richard T. Carucci predicted "sustained unemployment and a concerned U.S. consumer."
The contrasting views illustrate the two-speed recovery: Production of business equipment has increased 5 percent this year through June, while output of consumer goods has risen just 0.2 percent, Federal Reserve data show. The likes of Intel, Microsoft (MSFT), and Oracle (ORCL) are benefiting as companies replace outmoded equipment and software. Meanwhile, Yum, which owns KFC, Taco Bell, and Pizza Hut, and toymaker Mattel (MAT) are lagging as the 9.5 percent jobless rate takes its toll on consumers.
The stock market has picked up on the two-speed theme. Since April, PowerShares QQQ (QQQQ), an exchange-traded fund that mimics the tech-heavy Nasdaq 100 Index, has outpaced the SPDR S&P Retail ETF, which includes retail stocks such as Amazon.com (AMZN) and Best Buy (BBY). On its own, the pickup in business spending is not enough to rev up the economy; it's household demand that makes up 70 percent of U.S. gross domestic product. So in June, Fed policymakers trimmed their forecast for U.S. growth this year to 3 percent from 3.5 percent and pledged to keep interest rates near zero. "Policymakers noted that firms' investment in equipment and software had advanced rapidly of late," according to minutes of the June 22-23 meeting. "The rise in consumer spending slowed in recent months after a brisk increase in the first quarter."
Another brisk increase doesn't seem likely soon. Confidence among U.S. consumers tumbled in July to the lowest level in a year, according to the Thomson Reuters (TRI)/University of Michigan index of consumer sentiment released on July 16: A record low share of Americans expected their incomes to rise in the next 12 months. No surprise, then, that Yum's restaurants felt the pain, with the company's net income sliding 6 percent, to $286 million, in the second quarter. One bright spot: Yum's $10 value pizzas have been a "huge hit," CEO David C. Novak said on a conference call. "Being premium-priced in [this] environment is certainly not the strategy anyone can pursue," he added. Shoppers are forgoing plastic, too: Citigroup (C) reported use of its cards dropped 7 percent in the second quarter.
Companies catering to consumers are watching expenditures closely. As a result, inventories rose just 0.1 percent in May, the smallest gain this year. "I don't think anybody is building inventories in anticipation of renewed consumer spending," Mattel CEO Robert Eckert said in a conference call on July 16.
The bottom line: A two-tiered recovery is under way as business buys new equipment and consumers hold back. The result is slower growth.