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Consumers Remain Buoyant

The pace of consumer spending has been a hot topic ever since the late 90s. During the recession, consumer spending never retrenched in order to work off the excess from the boom. The easy money policies of the Federal Reserve are the primary reason for the strength in consumer spending. Now that the Fed is starting to raise interest rates, the strength of the consumer will be tested. There are some early indications that consumer spending started to weaken in March, but most of the data points continued to show that consumers were not shy about opening up their wallet.

According to First Call, same store sales in March increased by 3.9%, missing analysts' estimates of 4.4%. Most of the shortfall came from the department stores. Analysts expected department stores to increase same store sales by 1.2%, but instead sales fell by 1.0%. May and Dillard's were by far the laggards. Same store sales fell 10.8% at May and 8.0% at Dillard's. Drug stores were the only group to post better than expected results.

Retail sales as calculated by the US Census rose 0.3% from February and only increased 0.1% excluding autos. This was far weaker than the 0.8% and 0.5% gains that were expected. On a year-over-year basis, retail sales increased by 7.3%, which was the quickest pace since December. It was also on top of a 10.4% increase last year. The seasonally adjusted data showed much weaker growth, 5.8%. It should be noted that the monthly data is seasonally adjusted. I usually use unadjusted data and analyze it on a year-over-year basis. That eliminates most of the reasons to use adjusted data. We discussed last week that retail sales would get a boost from an earlier Easter this year. This would also cause the seasonally adjusted data to be adjusted downward this month to account for the increased buying for Easter. Likewise, the adjustment should boost sales growth next month. Looking at what categories had the largest adjustments; it does appear that adjustments for Easter did negatively impact the reported data. On an unadjusted basis, sales at clothing stores increased by 7.2%, the largest increase since last April, but after adjustments the growth was only 1.6%. There was also a large adjustment for general merchandise stores (7.8% unadjusted v. 4.4% adjusted) and food & beverage stores (7.9% v. 4.6%). If spending remained strong and it was the adjustments for Easter that caused the data to appear weaker, April retail sales will likely be stronger than economists expect.

Bigger ticket items have started to show some weakness. Furniture sales were weak in March, only increasing by 1.9% from last year. This was the slowest growth since May 2004. Conversely, electronics stores sales jumped 7.1%, which is the strongest year-over-year gain since July 2004. Also pointing to slower demand for big ticket items was the announcement that Harley Davidson will reduce 2005 production by 10,000 units due to disappointing first quarter retail demand. This would bring shipments to 329,000 units, 3.7% higher than in 2004. The company also lowered earnings growth guidance for the rest of the year to 5%-8% growth. The company also said that steel surcharges added about $8 million to its costs.

Besides higher steel costs, manufacturers are contending with higher resin costs as well. Bemis, the largest producer of packaging for food and pharmaceuticals, announced that, "resin cost increases that occurred late in the fourth quarter and during the first quarter have temporarily outpaced our ability to adjust related selling prices." Earnings will be about $0.30 per share, about a dime lower than analysts were forecasting. Confirming that the economy remains robust, the company also said that revenue will raise 7%.

Newsprint prices have started to rise. Gannett, the publisher of the USA Today, said that its prices were 8% higher from last year, but added that newsprint producers will have a difficult time passing along future price increases. It said the producers will continued to be faced with the realities of declining consumption and higher inventories. I always like to read the conference calls from the Newspaper companies. They are able to offer a grassroots looks at a lot of geographic locations in a lot of different industries. Gannett, announced that advertising revenues increased 4% led by a 6% increase in local advertising during the first quarter. The company noted strength in department store, grocery, and telecommunications while its furniture, entertainment, financial, and restaurants categories lagged last years results. Help wanted adds increased 9%, which more than offset auto's 4% decline resulting in total classified revenues to be up 4%. Gannett said there was a slowdown during the last two weeks of March. It also had interesting comments regarding the housing and automotivesectors.


"I think the major reason for the negative number there was the new homes being built in some of the larger markets like Phoenix and whatever. We're seeing a slow down in -- in the developers that have been going great guns. The resale of existing homes has been pretty strong. But a couple of these very, very large developer categories is the reason we saw that slowdown in March. I don't know whether that tells us anything other -- other than Easter again and people backing off. It was a little bit softer than I thought. But we're going to have to see what happens in -- in April. Generally real estate's okay. But a couple of these big categories were down."


"dealers are telling our newspapers that they have too much inventory of product that they can't sell and not enough inventory of products that they would like to sell therefore, they are waiting for some help from the manufacturers&I think this softness is going to last a little while&But the general answer is there seems to be a little bit of a saturation of automobiles and trucks, for that matter, and not enough buyers to justify the inventory."

Ford followed General Motors lead and announced that its earnings will not meet analysts' forecasts for the full year. Instead of earning $1.75 to $1.95 this year, the automaker will earn $1.25 to $1.50. This announcement came just three weeks after the company calmed investors following the warning issued by GM by saying that earnings would be "at the lower end" of its guidance. Similar to GM, Ford blamed higher costs for steel, energy and health-care.

While there were some indications that consumer spending started to moderate in March, it's difficult to believe the economy has started to weaken. Additionally, every time the economy has started to weaken over the past couple of years, interest rates declined spurring consumers to open up their wallet, or refinance, again. With the credit market currently under pressure from General Motors and Ford, there is a chance that the liquidity faucet will stop flowing. Once credit stops flowing to consumers its likely the decline in consumer spending will be steep and swift.

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