PowerTrend Brief: Back to School Spending Boom or Bust?

With the lackluster July employment report behind us, we are firmly into August, and the temporarily slower pace of life as summer vacation season sets in. To others, it means that preseason fall sports are getting under way — football, lacrosse, field hockey and so on — and many parents and students have kicked off back-to-school spending.
How big is that spending? According to the National Retail Federation’s (NRF) 2012 spending survey conducted by BIGinsight, the average person with children in grades K-12 will spend $688.62 on his or her young scholars. In total, that spending, according to the NRF, adds up to $30.3 billion. Factor in college, and the combined K-12 and college spending is forecast to reach nearly $84 billion this year. At that pace, back-to-school spending is the second-biggest consumer revenue source for retailers behind the winter holidays.

Now that all sounds pretty rosy, but a healthy dose of context offers a more sobering take on the numbers. The NRF’s nearly $84 billion figure is some 22% higher than the $68.8 billion spent last year. Keep in mind that job creation has been roughly the same as last year — averaging 150,000 to 155,000 jobs per month — and the unemployment rate has started to climb again.

While consumers will spend — in many respects they have to as children grow, sports seasons gear up and school supplies are needed — recent income and spending reports suggest that they will do so in a more restrained fashion. Over the past several months, data from the Bureau of Economic Analysis point to far more restrained spending, as consumers look to save more than spend in the face of minimal growth in disposable income over the past few months. Commentary from American Express (AEXP) confirms this situation. American Express officials reported that global billed business slowed meaningfully in July, compared to 2Q 2012. Similar commentary from MasterCard (MA) and Visa (V) points to slower consumer spending ahead in the current quarter.

As we learned in the July jobs survey, the average workweek has remained about 34.5 hours since at least March, and average hourly earnings over the same period have stagnated. In other words, on the personal balance sheet, revenue (or, in this case, income) is not growing. With that in mind, there is little wonder that the latest Gallup Economic Confidence Index fell from a reading of -22 in June to -26 in July. The July reading is nearly equal to the low reading for the year of -27 in January.

On the cost side of the equation, we are starting to hear more companies talk about passing on the brunt of rising input prices to consumers. Given the drought in the Midwest that is driving corn and soybean prices higher, odds are that we will hear more of this talk in the coming weeks and months. Unbeknownst to many, below-normal monsoon rainfall in India is the chief cause of a 7.8-million ton downward revision in the forecast for global rice production this year, according to the Food and Agriculture Organization of the United Nations.

Although consumers already can feel the pain at the grocery checkout, odds are that food prices will climb even more.

So, how will consumers close the income-spending gap?

They will cut back on discretionary spending, buying what they need when they need it, looking for more deals, sales and the like and trying to stretch their dollars as far as they can. To me, this situation does not bode well for consumer spending on restaurants and impulse items. Rather, eating at home, necessities and other inelastic items such as toothpaste, paper products and so on will continue to receive their share of spending dollars.

To get a better read on what and where consumers are spending, over the next few weeks I will be conducting mall walks around Greater Washington, DC. I’ll share more in the coming weeks as I walk the malls and count the bags.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, Aug. 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.

This Week Ahead

The next few trading days make for a big week in retail news. Early in the week, we get the government’s take on July retail sales, as well as inflation and several regional readings on manufacturing activity. That snapshot will quickly give way to a virtual onslaught of retail companies reporting their quarterly results. Investors and traders alike will be watching to see if the growing trend — missing on revenues, but meeting earnings expectations — continues. My take on retailers is that their cost structures will benefit from falling cotton prices, but the top line will be challenged by weak disposable income and the crimp that consumers have put in spending the last few months. Earnings guidance and company outlooks will be key indicators as we head into the all-important second half of the year. The second half of the year contains the two largest consumer spending events — back to school spending and the Christmas holiday season.

Here’s a more granular look for what’s on tap this week:

Monday, Aug. 13
CTI Industries Corp. (CTIB)
Elector Sensors Inc. (ELSE)
Groupon Inc. (GRPN)
Kid Brands Inc. (KID)
Parker Vision Inc. (PRKR)
Sysco Corp. (SYY)

Tuesday, Aug. 14
Retail Sales (July)
Producer Price Index (July)
Business Inventories (June)
NFIB Small Business Optimism Index (July)
American Apparel Inc. (APP)
Dick’s Sporting Goods (DKS)
Estee Lauder Companies (EL)
Flower Foods Inc. (FLO)
Home Depot Inc. (HD)
Saks Inc. (SKS)
TJX Companies (TJX)

Wednesday, Aug. 15
MBA Mortgage Index (Weekly)
Consumer Price Index (July)
Empire Manufacturing Index (August)
Industrial Production (July)
Capacity Utilization (July)
NAHB Housing Market Index (August)
Abercrombie & Fitch Co. (ANF)
Applied Materials (AMAT)
Cisco Systems (CSCO)
Deere & Co. (DE)
NetApp Inc. (NTAP)
PetSmart Inc. (PETM)
Staples Inc. (SPLS)
Target Corp. (TGT)

Thursday, Aug. 16
Weekly Initial & Continuing Jobless Claims (Weekly)
Housing Starts (July)
Building Permits (July)
Philadelphia Fed Survey (August)
Aeropostale Inc. (ARO)
Bon-Ton Stores (BONT)
Cato Corp. (CATO)
Children’s Place Retail Stores (PLCE)
GameStop Corp. (GME)
Gap Inc. (GPS)
Perrigo Corp. (PRGO)
The Buckle (BKE)
Wal-Mart Stores (WMT)

Friday, Aug. 17
Michigan Consumer Sentiment Index (August)
Leading Indicators (July)
Casual Male Retail (CMRG)
Foot Locker Inc. (FL)
Hibbett Sports Inc. (HIBB)
J.M. Smucker Co. (SJM)

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