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How will consumption shape investments after the payrolls report?

Part 2
How will consumption shape investments after the payrolls report? (Part 2 of 12)

Gallup’s consumer spending release impacts retailers like Walmart

What does Gallup’s U.S. consumer spending indicator measure?

Gallup’s self-reported consumer spending poll for the U.S. in March is due to release on Monday, April 7.

Gallup tracks daily discretionary expenditures through 13,000 interviews with American adults, surveying respondents on their discretionary spending expenditure the previous day. The expenditure estimate doesn’t include regular household bills or what consumers spent on big-ticket items like refrigerators or cars.

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Highlights from February’s report

Average consumer spending for Americans in February surged to $87 per day, after January’s unusually low, weather-impacted level of $78, as consumers made up for January’s consumption postponement.

The difference between January and February’s daily spending levels, at $9, was the highest recorded (jointly with the year 2008) since Gallup first began tracking the indicator seven years ago.

Discretionary expenditure levels in February increased by $10 per day month-on-month and $7 per day year-on-year for households whose income levels are below $90,000 per year. This shows a broader recovery, affecting a larger cross-section of the economy.

What to look for in the March report

In March 2013, daily discretionary consumer spending averaged $89. March 2014 figures will be important in assessing whether February’s surge was a one-off phenomenon due to consumers underspending in January or a trend that’s tending toward the pre-recession highs of over $100 per day.

Two factors will uniquely impact discretionary consumer spending this March.

  1. Food budgets may have increased by as much as 10% due to the rise in food prices brought on by the drought in California, thought to be the worst on record.
  2. Shifting Easter dates from March last year to April this year will also impact year-on-year comparisons.

Investor impact

Discretionary spending directly impacts the retail sector, with increases or decreases in discretionary spending likely to increase or decrease top-line results for retailers. The Market Vectors Retail ETF (RTH), which tracks the Market Vectors US Listed Retail 25 Index. The index is designed to track the overall performance of the 25 largest publicly listed retailers in the U.S. The top holdings in the ETF include the S&P 500 Index (VOO) components Amazon.com (AMZN), at 8.1%, and Wal-Mart Stores Inc. (WMT), at 8.04%.

Increases in discretionary spending are also associated with economic expansion, as consumption expenditure makes up over two-thirds of the economy. Interest rates usually rise during an expansion, which would mean a fall in bond prices. Investors can benefit from rising rates by investing in floating rate ETFs like the iShares Floating Rate Bond (FLOT) and the Market Vectors Investment Grade Floating Rate ETF (FLTR). As interest rates rise, these ETFs will benefit from rising rates, as their interest rates aren’t fixed but benchmarked to a reference rate and reset at periodic intervals.

To find out about consumers’ use of debt financing, read on to Part 3 of this series.

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