Does the Market Really Need Consumer Spending?

Neil George

The U.S. economy and stock market don’t need consumers as much as you think they do.

Consumers count for a lot in the U.S. economy — but not as much as you may think when it comes to changing the direction of the economy, and even less when it comes to the direction of the stock market.

Yes, as a percentage of the U.S. GDP (Gross Domestic Product), consumer spending is reported to be the single largest component. It typically runs around 70 percent of GDP, as tracked and reported by the U.S. Bureau of Economic Analysis. And as you can see in the chart below, it’s actually been climbing in recent years.

(Source: US BEA)

But there are some caveats. The consumption expenditures take into account all spending for all goods and services — even those made outside the United States. So, for example, when consumers buy a million Apple (AAPL) iPhones, the total dollar sum is theoretically added to the consumption number — even though a great deal of the value was added not by the sale, but by the manufacturing done in Korea, China and elsewhere.

In addition, there are other expenditures, including healthcare, in which the total sum of the bills paid for service is included, even if it actually is being paid by government healthcare programs such as Medicare or Medicaid.

So when the headlines in the financial papers start to run “doom and gloom” articles about the slowing of consumer spending and the pending damage for the economy and stocks, you need to take a step back and think through before panicking and selling.

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The U.S. Personal Consumption Expenditure (PCE) for December was somewhat less impressive, running at 0.2 percent — down from the recent high of September’s 0.8 percent. And with January’s number to be posted on March 1, some are expecting that lower number to be followed by February’s even lower results.

The arguments being made include some newer developments. First, the U.S. government increased the payroll taxes by 2 percent, meaning that a consumer earning $50,000 is now paying $1,000 more to the U.S. Treasury than he was last year. That’s $1,000 that can’t be spent elsewhere — but will of course be spent by Congress somewhere else.

Second, with the changes in tax rates, households, particularly those in the lower income brackets, were delayed in their ability to file their tax returns for the refund of their own over-payments to the IRS. This means that cash that tends to go right to consumer spending is being delayed.

Third, gasoline prices are up sizably, with the national average, according to AAA, for unleaded regular running at $3.77. This means less available cash for other expenditures. But at the same time, that spending at the pump gets added into the PCE just the same as if that cash were spent at Macy’s (M).

So, we have government still getting to spend more dollars, a simple delay in refunds that will get into the market eventually and gasoline spending that’s still part of the economy. Bottom line — the PCE should still remain in similar territory during the coming months.

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But even if it does drop, it won’t be as big of a threat even to consumer stocks.

Wal-Mart (WMT), along with other retailers and consumer product companies, have been coming out with statements warning of a coming impact from what they see as a drop in consumer spending caused by the reasons noted above. But the issue might not be consumers in general, but Wal-Mart specifically.

For if you look at that company’s trailing quarterly revenues for the past year when the PCE was running strongly, revenue gains have been almost flat at an annual rate of 1 percent.

Moreover, from a stock market standpoint, the last major slide in consumer spending over more than just one month, June 2008 to July 2008, consumer goods companies were one of the better components of the general U.S. stock market, as shown below.

With the PCE down 3.72 percent, the S&P 500 consumer goods index’s fall was less than half of the plunge in the general full S&P 500 index, showing the staying power of regular consumption expectations, even during economic and market troubles.

Now, a loss is still a loss, even if it’s less than a bigger one. But with the PCE not slated to slow or drop by much beyond a month or two, and the government’s additional tax take showing up in the general GDP, don’t use Wal-Mart’s excuses for company-specific problems to be reason to exit the overall market or other, more successful consumer stocks.

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