WEALTH EFFECT DRIVES U.S. CONSUMERS TO KEEP SPENDING
Retail Sales Rise 0.2%, but Core Climbs at 0.5% Pace
Consumers spent more freely at restaurants and department stores in July, despite holding the line on big-ticket purchases, a sign the economy could gain steam in the second half of the year.
U.S. consumers continued spending steadily in July, signaling shoppers are likely to remain the engine of the economy’s slow but steady expansion in the months ahead.
Retail sales climbed a seasonally adjusted 0.2%, for the fourth consecutive month of increases, the Commerce Department said Tuesday. The previous month’s gain was revised up to 0.6% from 0.4%, amid brisk demand for cars and furniture.
Shoppers at Ace Hardware Corp., an Oak Brook, Ill., retailer cooperative that operates 4,700 stores globally, are “seeing the value of their homes and retirement accounts go up,” said Chief Executive John Venhuizen. “That wealth effect is making people feel more comfortable buying higher-priced items like barbecue grills, which increased by double digits in July” from a year earlier.
Consumers started the year confronted by higher taxes, surging gas prices and federal budget cuts. However, more than halfway through 2013, they are notching the highest confidence levels in years. Economists attributed the optimism to a gradually improving jobs picture, rising home values and the bull market in stocks.
“A stronger jobs recovery would certainly be welcome, but consumers have a lot more going for them then we have seen in quite some time,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
July’s retail report showed spending rising on groceries, clothes, sporting goods and restaurant meals. As business improves, some restaurateurs are adding higher-priced items to menus.
“For the first time in my entire career, I am seeing white truffles in the middle of summer coming from places like Australia, where shavings can add $30 to a portion of pasta,” said Danny Meyer, chief executive of Union Square Hospitality Group in New York, which operates Shake Shack restaurants, as well as ballpark concessions and catering services.
However, retailers and analysts are predicting a muted back-to-school season as cost-conscious parents wait longer to shop for children’s school clothes and supplies, and put off big purchases like laptop computers and televisions for college students.
July’s report offered scant evidence of the housing recovery that has accelerated in 2013. Retailers of furniture, building materials, electronics and appliances all saw sales contract during the month, with demand curbed by soggy weather in some of the country.
Sales of cars and parts, which rose a revised 2.9% in June, retreated 1% last month. A 0.9% increase in spending at service stations reflected July’s flare-up in gasoline prices—from an average $3.49 for a gallon of regular to $3.68. (Gasoline prices since have edged down to $3.56 a gallon.) Core retail sales—a measure that leaves out cars, gas and building materials—increased 0.5% in July, after rising 0.1% in June.
“I think the big picture literally is that households are getting close to a position where they’ll be able to spend a bit more vigorously,” said Paul Dales of Capital Economics. “When you look back at what happened in the past four years, employment has improved, households have paid down debt, confidence has returned to a normal level.”
Midyear readings from the Conference Board as well as Thomson Reuters and the University of Michigan show consumer confidence is at its highest point in more than five years.
The stock market and rising home prices have played a role in boosting confidence. In 2013, the Dow Jones Industrial Average is up nearly 18% to 15451.01. During the 12 months ended in June, the median sales price of existing single-family homes rose 13.2%, according to the National Association of Realtors.
In a healthy economy with near-full employment, every $1 increase in stock wealth raises consumer spending by roughly three cents over an 18-month period, said Mark Zandi, chief economist at Moody’s Analytics; every $1 in housing wealth sends up that spending by eight cents. The effect is less potent in today’s slower economy, he added, translating into about two cents of spending for every $1 in stock wealth and five cents for every $1 in housing wealth.
The wealth effect has been “the key to turning things around” for high-income households and some middle-income ones, Mr. Zandi said. By contrast, “low-income households are still struggling,” although the recent easing in gas prices should provide some relief.
Karen McDonough a 41-year-old risk analyst, said she and her husband are spending sparingly, postponing renovating their Boston home and halting investments in a retirement fund. The couple is trying to rebuild emergency savings depleted when Ms. McDonough’s husband lost his job and “we hit rock bottom” four years ago.
Browsing this week at a Bed Bath & Beyond in Washington, D.C., where she was visiting family, Ms. McDonough said, “The economy might be getting better for some people, but it’s not improving at the same rate for everyone.”
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U.S. Consumer Spending
