The Consumer Is Still Not on Board

Dr. Stephen Leeb submits:Despite some positive economic news that has come out in recent weeks, one area of the economy that has yet to show real signs of improvement is retail spending. American consumers are still reeling from the near collapse of the U.S. economy, and nearly 10 percent of them don’t have a job (many more if you count partially employed). This raises doubts about the sustainability of the recovery, given that personal consumption accounts for roughly 70 percent of U.S. GDP. Consumer sentiment is still not back to normal. Yesterday the Conference Board announced that its consumer confidence index had fallen from an upward-revised 56.5 to 46.0. The historic average of the index is 95.6, which means that the recovery, from the consumer’s perspective, has a long way to go. When consumers were asked to assess the current-day conditions, the relevant index fell 5.8 points to 19.4 – its lowest level since 1983. Perhaps even more worrisome, the Expectations Index, which measures the six-month outlook, also declined, dropping 13.5 points to 63.8. The main factor contributing to these declines was, not surprisingly, the dismal job climate. The percentage of those saying that jobs are “hard to get” increased from 46.5 to 47.7; in contrast, the percentage of those saying that the number of jobs available was “plentiful” fell from 4.4 to 3.6. The job market did improve slightly in January, with the unemployment rate falling by three-tenths of a percentage point to 9.7 percent. But this will hardly put to rest the concerns that workers have about job security or their employment prospects. Also, don’t expect the jobs bill that Congress is working on to have any meaningful impact on the job market; according to a survey of small businesses by American Express, the main factor that determines hiring is customer demand (42 percent of respondents), not tax credits (11 percent), which is what the job bill offers to employers. In other words, when it comes to stimulating employment growth, Congress is trying to put the cart (i.e., jobs) before the horse (i.e., consumption). Still, despite the lousy consumer climate, many large retailers have reported having higher earnings last quarter. But, as has been trend in recent quarters, these companies made their profits largely through tighter cost controls rather than growing sales. Wal-Mart Stores (WMT), which is part of our Growth Portfolio, is a useful bellwether for judging consumer behavior. Over the holiday season, the world’s largest retailer took aggressive steps to try and lure consumers away from their competitors with a series of targeted promotions. The result was that the company beat its guidance, reporting a gain in profit of 22 percent. For the quarter, Wal-Mart had earnings of $4.7 billion, or $1.23 per share. The company did manage to boost sales by 4.6 percent to $112.8 billion, but same-store sales dropped 1.6 percent. At the company’s namesake stores, revenue was down 2 percent, and over the full year, sales were flat. According to the company’s CEO, Mike Duke, Wal-Mart expects its first quarter to be a challenging one as well, partly because of price declines in the areas of food and electronics. The improvement in earnings came in part from better cost savings as the company’s gross margin increased from 24 percent to 24.4 percent. Despite its mixed results, Wal-Mart remains our top pick in the retail space as a low cost and market share leader. Shares trade at 13.4 times current year consensus earnings estimates while yielding 2 percent, and are attractive at these levels.Complete Story »