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Home Depot Outlook Depends on the Consumer

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Dec. 4 2020, Updated 3:53 p.m. ET

Employment and consumer spending

Personal consumption expenditure, or PCE, makes up almost 70% of GDP (gross domestic product). Employment factors and income are some of the most prominent variables affecting PCE. Unemployment in the US is falling faster than expected. Non-farm payrolls rose by ~3.7 million in 2014, with an average increase of ~261,000 per month.

This year, non-farm payrolls have risen by over half a million. As a result, the Fed has altered its expectations for the unemployment rate, from between 5.2% and 5.3% to between 5% and 5.2% by year end. Higher employment would imply higher discretionary incomes, providing a potential upside to consumer spending (XLY) (XLP) (XRT).

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Energy prices

Incomes also tend to get boosted by lower energy prices. West Texas Intermediate prices hit a six-year low of $43.90 on March 16. This tends to benefit the pocketbooks of consumers. Nevertheless, consumer spending has remained cautious in the aftermath of the Great Recession. Although employment has risen, spending hasn’t shown the same traction.

Retail sales environment

Retail sales declined for three months in a row between December 2014 and February 2015. These categories experienced month-over-month declines in February:

  • furniture and home furnishing stores – -0 .1%
  • electronics and appliance stores – -1 .2%
  • building material, garden equipment, and supplies dealers – NA

Challenges for Home Depot

It’s a tough retail and consumer spending environment at the moment. If they’re to increase sales levels, in-store execution, omni-channel efforts, and better customer service will be critical for retailers including Home Depot (HD) and Lowe’s (LOW).

HD and LOW together constitute 9.5% of the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY also holds 0.6% in specialty retailer and HD competitor Bed Bath & Beyond (BBBY).

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