Winter Economics: Consumer Spending Concentrated on Heating Needs

safeway retail shopping cart grocery

Economic reports in the first two months of the year have provided conflicting diagnoses about the health of the American consumer — whose spending accounts for approximately 70 percent of the United States gross domestic product. In many ways, the spending environment has been a difficult one; in both December and January, the U.S. economy created far fewer jobs than anticipated, a phenomenon that was likely the result of frigid temperatures sweeping the nation but nevertheless impacted how much discretionary income many Americans had at the beginning of the year.

In general, the economy was not as strong in the final months of 2013 as previously thought, with weaker momentum in consumer spending, and that serves to explain, in part, why consumer spending measure have not shown the marked improved economists had expected. Last Friday, the Department of Commerce’s Bureau of Economic Analysis slashed its earlier estimate for fourth-quarter gross domestic product from the 3.2 percent pace it reported last month to a 2.4 percent annual rate. The downward revision was a sign that the economy had indeed lost momentum in the final three months of 2013 as feared. While everyday private-sector activity drove the economy forward in the fourth quarter, real personal consumption expenditures were lowered from a 3.3 percent increase to a 2.6 percent gain.

Then Commerce Department data showed that January was the second consecutive month of negative growth in retail sales, while Gallup’s self-reported spending survey found that in the first month of the year, consumers spent an average of $78 per day, not including normal household bills and major purchases such as homes and cars. That figure was a 14-month low. When the Commerce Department’s February retail sales report is released on March 13, economists will have a clearer picture of consumer spending, but Gallup’s self-reported spending survey has already indicated that February may have been a better month than for the American consumer than January, with daily spending rebounding to an average of $87 — an increase from the $83 reported in February 2013 and the strongest February result since 2008. It is by no means unusual for February spending to be higher than January’s; typically, consumers spend less in the first month of the year after spending relatively more during the Christmas holiday season.

But snapshot of retail sales compiled by the industry trade groups — the International Council of Shopping Centers and Johnson Redbook — have indicated that consumer spending has been relatively weak throughout the month of February. A January decrease is consumer spending is typical; shoppers often decrease expenditures following the holiday season, but both the same-store sales index compiled by ICSC with Goldman Sachs and the Johnson Redbook index have shown that retail sales numbers have not yet improved significantly from January’s lows. For the week ended March 1, the same-store sales indices reflected ongoing weakness, although the ICSC-Goldman Sachs same-store index was marginally stronger than in the previous week.

The ICSC-Goldman Sachs index — one of the most timely indicators of consumer spending — has recorded extremely weak readings in February. Early in the month, the year-over-year same-store sales growth reading hit a recovery low of 0.0 percent. That measure has rebounded to some degree, but it has yet to post expansion consecutively. Still, on a year-over-year basis, same-store sales growth recovered lost ground in the period ending March 1, expanding at a 1.5 percent rate after the previous week’s 1.4 percent rate of expansion. The index also increased 0.3percent on a weekly basis, a significant reversal from the 0.3 percent drop recorded in the previous week.

“As retailers faced more adverse weather over the prior weeks, they stepped up their promotional activity during the past week, which helped sales at some retailers, such as department store,” ICSC Chief Economist Michael Niemira explained in a Tuesday press release. “But the ongoing negative impacts of stormy weather caused us to pare our monthly estimate of sales to about 3 percent from upwards of about a half percentage point higher. Yet, easy year-ago comparisons should still dominate the February report,” he added. Plus, a large number of discounts will impact profits for retailers.

Johnson Redbook’s weekly reading remained unchanged from the previous week’s weak reading. The index has expanded 2.9 percent over the past 12 months, while Redbook’s index dipped 1.3 percent from the comparable period in January.

The other piece of evidence of consumer health handed economists Monday was the Commerce Department’s Personal Income and Outlays report. Retail sales shine a light on consumer spending, but personal income and outlays numbers provide a more direct look about the financial state of the American consumer. Incomes, which had been flat in December, did rise 0.3 percent in January, meaning consumers had more money to spend. But spending was questionable, confirming the dismal outlook expressed in the department’s retail sales report. Household purchases did increase $48.1 billion, or 0.4 percent, following December’s smaller-than-expected 0.1 percent gain. Yet, consumer spending rose as outlays on services recorded their largest increase since late 2001. Likely, it was demand for heat that fueled that jump. The Commerce Department also noted that outlays on services were boosted by increased spending on health care as Americans began to enroll and pay for the Affordable Care Act mandated insurance coverage.

“Despite all the winter economics, it points to better-than-expected income, wage and spending growth,” IHS Global Insight director of consumer economics Chris Christopher told the Los Angeles Times. “However, a significant amount of the spending occurred on necessities and not on discretionary items.”

More From Wall St. Cheat Sheet:

Follow Meghan on Twitter @MFoley_WSCS