Uptick in consumer spending spells good news: LPL strategist

Consumer income fell slightly in August and spending increased slightly to extend the ongoing conundrum involving consumer sentiment and consumer actions.

Consumer income fell slightly in August and spending increased slightly to extend the ongoing conundrum involving consumer sentiment and consumer actions.
“The latest data highlights the most dramatic gap in the markets today as being the difference between what consumers are saying and what they are doing,” said Jeff Kleintop, chief market strategist at LPL Financial Services.
Mr. Kleintop was referencing today’s report from the U.S. Commerce Department, which showed personal income declined by 0.01% in August, while spending increased by 0.02%.
The numbers are more telling, he explained, when you consider them on a year-over-year basis; that shows income up 4.5% and spending up 4.7%.
While year-over-year spending levels should ideally be hovering around 7% at this point in the cycle, Mr. Kleintop pointed out that “the key is we’re not retrenching.”
“The spending levels we’re seeing mean lower and sluggish economic growth,” he said. “But it’s also not flashing a signal of a recession.”
What is so perplexing to market watchers like Mr. Kleintop is that the latest data run contrary to what consumers are saying when sentiment is measured.
While consumer confidence, as measured by the Thompson Reuters/University of Michigan Index, climbed slightly last month off a level equal to that seen in November 2008, it remains near recession levels.
“The sentiment numbers we’re seeing are in line with every past recession, yet the evidence is not really there in the things that we can count,” Mr. Kleintop said. “What we’re left with is a big gap between the hard data and the soft sentiment.”
One culprit might be the media and the general flow of negative information, said Frank Fantozzi, president and chief executive of Planned Financial Services LLC, a $250 million wealth management firm.
“There are some positives out there that don’t always get a lot of attention,” he said. “And then you have all the attention placed on a country like Greece, which is smaller than most U.S. states.”
Mr. Fantozzi points to a positive outlook for third-quarter earnings as one example of strength that might not be getting enough attention.
“Companies have learned through the recession to become very productive,” he said. “There are a lot of good indicators out there. and that’s why the stock market is going to be strong over the next four or five months.”
There’s no denying that August was a difficult month virtually across the board and around the globe.
But while the S&P 500 Index declined by 5.7%, both industrial production and durable-goods orders came in above analysts’ expectations.
And retail sales, a solid indicator of consumer spending activity, showed real promise.
Saks Inc. (SKS) reported that same-store sales were up 15.5% from a year earlier. At Nordstrom Inc. (JWN, sales were up 7.3%.
And on the discount retailer end, same-store sales at Dollar General Corp. (DG) were up 5%.
“August is usually a pretty weak month for spending, and there’s a lot of discounting by retailers,” Mr. Kleintop said. “But most of the comparable store numbers were pretty good.”