Investment Contrarians

Why the Soft GDP May Foreshadow Light Spending

By for Investment Contrarians |

Soft GDP May Foreshadow LightWhile Black Friday is another seven weeks away, there is already mounting speculation on how good the holiday shopping season will turn out to be for the retail sector.

A strong fourth-quarter for the retail sector could boost the country’s gross domestic product (GDP) growth, since consumer spending accounts for about 70% of the GDP. The second-quarter GDP (third estimate) reflected the current stalling in U.S. consumer spending, as the GDP growth of 1.3% was well below the estimate of 1.7%. This represented the slowest rate of growth since the third quarter of 2011. (Source: “Economic Calendar,” Yahoo! Finance.)

Given this, you kind of have to wonder about the underlying strength of the consumer spending. GDP is estimated to grow at 2.7% in the U.S. in 2013. (Source: “2013 Economic Statistics and Indicators,” Economy Watch, October 5, 2012.) This implies a slight rise in consumer spending.

The retail sector is showing improvement in sales, but consumer spending on durable goods was horrible in August, when spending on non-essential goods and services cratered 13.2% (source: U.S. Census Bureau News, U.S. Department of Commerce, September 27, 2012), versus the -5.0% estimate and the -4.1% in July (source: “Economic Calendar,” Yahoo! Finance). Even when you eliminate the transportation portion, consumer spending on durable goods fell 1.6%, again worse than the -0.2% estimate and revised -1.3% in July.

The reality is that America as a whole needs to spend and drive retail sales, but this is not happening. The poor reading indicates hesitancy in consumer spending in the retail sector on non-essential goods and services that, in my view, is a key component of a healthy and growing economy. When consumers refrain from buying non-essential goods and services, it shows a lack of confidence in the economy, thereby impacting consumer spending in the retail sector.

The decline in durable goods represented the biggest decline since the January 2009 recession period and it indicates a potential decline in factory orders. The number was disappointing, since prior to this, durable goods recorded three straight months of increases.

In September, same-store sales in the retail sector increased 3.6% (source: Thomson Reuters), which was in line with estimates but far short of the 6.4% rise in September 2011.

A lot of retailers are betting on a strong holiday shopping season driven by the easy money the Federal Reserve has in place for consumer spending. Yet until the country’s jobs growth rises and the unemployment rate falls, I sense consumers will remain hesitant; this will impact retail sector sales and the economy as a whole.

Moreover, there is still the uncertainty of the upcoming “fiscal cliff” in January, when automatic budget cuts and higher taxes come into effect. The concern towards this will likely impact the spending habits of consumers, who will cap their spending until there is a resolution following the presidential election in November.

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