Weekly CEO Commentary 10-22-12

For the third month in a row, retail sales numbers were stronger than expected according to the US Census Bureau. Perhaps the consumer is doing better than most give credit. This week I want to dive a little deeper into the consumer, because 70% of our economy is consumption, which drives corporate earnings.

Every category was up for the month with the exception of “Miscellaneous” (this category includes stores with unique characteristics like florists, used merchandise stores and pet supply stores).

To be fair, food and gas inflation has led to some of the gain. However, when you look at savings, revolving credit and personal income – factors that drive spending – they appear to confirm this positive trend.

First, consumers are willing to spend down their savings as the personal savings rate has dropped from 4.4% earlier this year to 3.7% in August. Either they are getting more confident in the economy or they are desperate and have no choice.

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Second, revolving credit has been increasing. This year alone consumers have added almost 10 billion in revolving credit. That's enough to add almost 1/10th of 1% to GDP growth. Not bad for all the fear we hear about the American Consumer.

Lastly, personal incomes have been stagnant for at least 20 years, and all the while consumers have found ways to continue to spend. While there is much debate over how to lift personal incomes, the data suggests we continue to consume in-spite of our slow growing wages.

It seems like we’re at a critical juncture in our forecast. If you simply look at all the good news about the consumer you could put more growth into your portfolio, meaning commodities, growth stocks versus value stocks, and technology stocks over dividend payers.

On the other hand consumer spending is closely tied to confidence in the economy:

• Consumers will spend savings down only to a minimal level based upon their confidence in the economy
• Consumers will only spend so much on credit based upon their confidence in the economy
• Consumers personal income will only increase based upon businesses confidence in the consumer

As you can see, this can be a bit of a vicious trap. In the case of a marginally confident consumer, a continued defensive approach might be warranted.

In either case, it appears the consumer is quietly spending and perhaps will continue to do so. This would be a big surprise to the consensus thinkers and could put a floor in for any market pull back we might be seeing right now.

If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.

Tim Phillips, CEO – Phillips & Company