How Healthy Is the American Consumer This January?

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Consumer spending was solid in December. Bad weather kept the sales of big-ticket items like automobiles low, but the Department of Commerce’s reading of the core measure of retail sales — which excludes spending on autos, gasoline, and building supplies — increased 0.7 percent in the last month of the year.

Economists believe that figure is a better proxy for Americans’ confidence in the economy because it does not include those volatile categories. While there were a few areas of softer growth, “most categories of stores posted solid growth,” HSBC economist Ryan Wang told The Wall Street Journal. Plus, Americans spent $431.9 billion on retail purchases and food services in December, an increase of 4.1 percent from the same month in 2012.

In general, the Commerce Department’s December reading of spending on retail purchases and food services confirmed the underlying strength in consumer spending trends, strength that has been growing since late summer. “On balance the report suggests consumers were feeling good and opening their wallets this holiday season,” Julia Coronado, chief economist at BNP Paribas, said in a note to clients.

Responsible for that underlying strength is the ongoing recovery of the U.S. economy. Over time, it is becoming clear that the modestly improving economy has slowly begun to strengthen business confidence in the United States, which in turn has prompted more companies to boost hiring.

Better employment gains, combined with growing household wealth from the stock market rally and improving real estate values, put a significant number of higher-income Americans in the position to increase their outlays.

Strong consumer spending is essential for the recovery of the American economy. Consumer spending accounts for approximately 70 percent of gross domestic product in the United States, and because government and business spending largely remained weak in 2013, the economy depended even more on household spending to fuel growth. For economists, the all-important question is where the consumer spending trajectory is headed this year.

According to Capital Economics senior U.S. economist Paul Dales, “if we’re right in thinking that the underlying trend in jobs growth is still improving, households will continue to spend more freely in 2014.”

The relationship between business spending, job creation, and consumer spending is a close one. U.S. businesses do not want to increase labor costs unless they are confident consumers will spend money on the goods and services they produce. Consumers must then spend money before businesses boost hiring.

However, the American public needs employers to increase job creation in order to feel more financially secure. U.S. employers added a fewer-than-expected 74,000 jobs in December. Yet while the payroll number was surprising low, not all economists are concerned.

“I wouldn’t pay any attention at all to these numbers. They’re not consistent with anything,” Moody’s Analytics chief economist Mark Zandi said to CNBC. “We’re going to get the benchmark revisions, and they’re going to be all revised up and revised away.”

While spending was sluggish earlier in 2013, with consumers primarily keeping purchases to their immediate necessities, the overall picture of consumer spending is one of improvement.

After showing resilience throughout much of last year — despite higher payroll taxes, which lowered spending power, and political crises, which disrupted both business and consumer confidence — economists see American consumers as much healthier than they were in the spring.

Heading into 2014, consumers appear upbeat. The Conference Board, a private research firm, reported last month that its index of consumer confidence increased in December as the result of growing optimism about the labor market and the economy.

January has only just begun, but the weekly snapshot of retail sales compiled by industry trade groups like the International Council of Shopping Centers and Johnson Redbook provide a glimpse of the month’s spending trajectory. Both indexes ended December with slowing or negative growth.

In the week ended January 11, the first full week of the month, the two indexes reflected a continued softness in same-store sales. However, as with December results reported by the Commerce Department, this weakness was largely the result of poor weather.

Screen Shot 2014-01-14 at 9.05.54 AM“Weather extremes and storms affected consumers’ ability and willingness to shop,” ICSC Research chief economist Michael Niemira said in its press release.

Improving significantly from the previous week’s 5.4 percent week-over-week increase, the ICSC-Goldman Sachs index dropped 1 percent in the first week of January, thanks in part to frigid weather in the Midwest and Northeast. On a year-over-year basis, growth continued to expand, but at far slower pace.

The index posted a 1.3 percent gain compared to the previous week’s 1.7 percent increase. That 1.3 percent gain was the lowest reading recorded since mid-October. Given the disappointing first week of the month, ICSC Research expects same-store sales to rise between 3 percent and 3.5 percent in January. For reference, December’s same-store sales grew 3.4 percent.

Johnson’s Redbook index also exhibited weakness, with the week’s numbers suggesting that consumer spending habits are shifting away from the holiday pattern to concentrate on basic commodities and food. The index has expanded 2.9 percent over the past 12 months, which compares with the previous week’s 4.1 percent rate of growth. However, Redbook’s monthly comparison improved, contracting at a 0.3 percent rate following the previous week’s 0.6 percent rate of contraction.

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