Consumer Shopping vs. Consumer Saving

Economic data from the past several months has established the return of consumer shopping. The last six months specifically have seen personal incomes on the rise, which has made the American consumer more willing to crack open his or her wallet and hit the shopping malls once again. Surely this increase in spending is good for the economy, but just where has the money been going and what does the trend say about the behavior of the post-recession-era consumer? Today, we explore the recent rise in spending and analyze what it means for both your wallet and the larger marketplace.

Trends on Wall Street

(source)

Perhaps forecasting a more significant rebound from the recession-era job market, the latest research data shows a modest increase in personal income earnings. Market research and activity blog TheStreet reported that, in May, “personal income grew 0.4%.” This increased earning trend appears to have positively affected consumer spending, which the article reports is up 0.2%. Curiously, this boost in spending occurred despite the fact that prices of personal consumption items experienced a rise to the tune of 0.2%.

Businessweek also reports that “U.S. retailers’ sales are growing at the fastest pace in four years.” Indeed, given the dismal state of our recessionary economy, these numbers are starting to look promising. If consumers begin coming out of their shells and shopping more, the economy can begin to slowly turn itself around. More shopping means more revenue for businesses, which could potentially mean more jobs and better pay for employees. As we are currently seeing, increases in personal earnings can also mean more shopping, and so the cycle continues. While no one is sure that we are indeed heading for a turnaround just yet, these numbers indicate that it is a definite possibility.

Companies Experiencing the Biggest Increase in Sales

(source)

Executives at S&P 500 companies are smiling this quarter as the Index experiences a 0.50% overall increase. Similar activity has boosted the Dow 0.30%. Such rapid growth raises the question of just who is causing this exceptional boost in consumer shopping behavior. TheStreet reports that Wall Street’s best recent performers have been Intel, Coca-Cola and Walmart.

It’s no mystery as to why Intel has been doing so well, as they supply chips to Apple, another company that has recently experienced a burst in business and a subsequent rise in stock. Apple has been having a busy year, releasing two important products so far: the iPad and the iPhone 4G. CEO Steve Jobs has called the iPhone 4G launch “the most successful product launch in Apple’s history,” having sold 1.7 million units since its release in June, each one containing a chip from Intel.

Walmart’s recent increase in business also makes sense considering that personal income is slowly growing. Earlier this year, we discussed how the average American consumer is now much more thrifty and cost-conscious than ever before. Since Walmart offers practically everything for your home and wardrobe at low prices, it seems that shoppers are spending their money wisely rather heading out to the nearest outlet mall and dropping their paychecks for designer extravagances. Congruent with this analysis is Bloomberg’s report that Kohl’s Corp., another frugal shopping haven, has been experiencing a significant increase in sales at all stores open for at least a year.

In accord with Businessweek’s claim of rapid retail growth, JCPenney Co. and Abercrombie & Fitch Co. have experienced a growth of 1.1%. Numbers like this indicate that, as consumers begin to earn more money, they are once again willing to spend it on the things they enjoy. Because JCPenney and Abercrombie are moderately-priced clothing retailers, it makes sense that consumers have begun returning to their registers, perhaps feeling as though they deserve to enjoy some of their earning increase without splurging too much of it in one place.

What About Savings?

(source)

Does the rise in consumer spending mean that people are abandoning the good savings habits they have developed through the necessity of the  recession years? Current data says no, and it appears that the modern consumer is trending more toward smart, cautious spending rather than the lavishness often seen in better times. BND.com claims that as incomes have risen over the last several months, so has the savings rate, which reflects the percentage of personal income that was not spent. As of May 2010, the savings rate rose to a healthy 4%. Corroborating the notion that consumers are still aggressively saving and looking to continue doing so is a recent article published by MarketWatch, which reports that, “independent investment advisors [are] in growth mode.”

Economists also do not seem worried that improvements to the economy might cause consumers to continue shopping more and eventually begin saving less. The Marketwatch report goes on to discuss the results of the 2010 RIA Benchmarking Study from Charles Schwab, which indicates that “84 percent of participating advisors plan to grow aggressively or moderately over the next five years.” Such findings show evidence of an American consumer who has learned the hard lesson that only recession-like times can teach: actively saving money at all times is a good thing.

What Does This Mean for the Future?

(source)

Experts seem to agree that the trend of increased spending is bound to continue throughout this year. According to more than 8,000 estimations compiled by Bloomberg, companies on the S&P 500 are predicted to experience a 34% increase in profit by the end of 2010. In concurrence with these estimations is Michael Niemira, chief economist at the International Council of Shopping Centers. In a phone interview, Niemira told Businessweek, “If you look at the underlying growth rate, it suggests a relatively healthy, moderate pace of spending for the remainder of the year.”

Although economists are certainly happy with the possible outcomes this trend indicates, we must be careful not to make too much out of it. After all, with unemployment still soaring around 9.7% nationwide and personal debt at a high, consumers are not totally out of the bog yet. However, they seem to be making the best of what’s around. Paul Dales, an economist at Capital Economics, comments that consumers “are still not setting this economic recovery alight, but nor are they rolling over in the face of … high unemployment and lower (stock) prices.”

LPL Financial Chief Investment Officer Burt White sees the recent upswing in spending as an indication that businesses need no longer fear the disappearance of the American shopper. “The underlying good news is that the consumer is hanging in there a little better than people thought,” he told TheStreet. White also commented that, if the spending trend continues, it has the potential to do some great things for our damaged economy. “If we see a modest recovery in both consumer spending and business spending, then we believe we’ll get GDP growth of 2% to 3%, and that will help stocks move higher.”

The New Consumer

(source)

With spending on the rise and projected to continue, should we also expect to see an abnormal spike in sales of Hummer trucks and Louis Vuitton bags? Research on consumer habits says no, as the new post-recession consumer has emerged a frugal, careful shopper. FoodProductDesign.com, a leading resource on the food and grocery industry, cites a recent consumer survey that shows that “89 percent [of shoppers] admit to becoming more resourceful, and 84 percent say they are more precise when they shop.” With this information in mind, retailers will likely begin ramping up marketing efforts to attract the sale-minded consumer and will back off putting all their publicity dollars behind expensive, image-only products.

This same survey goes on to report that “79 percent [of consumers] reported feeling smarter about the way they shop versus two years ago.” This is a feeling that many shoppers are likely to want to continue experiencing, especially given the lessons about saving that many of us were so harshly taught over the past several years. So, while the economic data does show that people have been returning to the stores, most consumers report feeling comfortable with their current frugal spending habits and most do not report wanting to begin splurging on unnecessary luxuries anytime soon. For instance, the survey indicates that 93% of people do not wish to increase their spending much past their current levels, even as the economy continues to improve, a finding which sheds light on the immediate future of consumerism. And, while only time can tell if the public can resist the call of the luxury mall, at the moment it appears that saving and cautious spending are at the forefront of consumer minds.