What’s Behind the Drop in Consumer Spending?

There’s no denying that consumer spending has been weak lately. Shares of fast-casual dining and retail stores have been feeling the pinch. The reason behind it is a drop in consumer spending, but what’s fueling the cutback?

One of the biggest problems has been stagnant wages. Despite the falling unemployment numbers, wages have stayed at essentially the same level for years. That’s taking a toll on consumer spending, and causing people to reign in their spending. Unfortunately this problem has no easy cure. Individuals can search for higher-paying jobs, but unless they’re willing to re-train themselves to search out better jobs, there isn’t much help for the problem.

Another factor in falling consumer spending has been rising commodity prices.
Meat, bread, eggs, and milk have all been getting more expensive. That leaves less for consumers to spend on retail goods. Coupled with stagnant wages, the rise in the cost of household commodities means that people are essentially being paid less than they have in decades.

Finally, there are residual factors to continue. The mortgage crisis is essentially over, but many people are still underwater on their homes. This has hurt the middle class more than anything else. Even with the prime interest rate being held at 0%, banks are reluctant to refinance some of the worst cases. That leaves the middle class stuck with a large bill every month, which takes money out of the pockets of many businesses.

However, even with all of the challenges that consumers are facing, the Consumer Non-Durables sector isn’t in decline. In fact, it’s been behind the recent surge in stock prices. Still, not every stock in the sector is in good shape. The October rally passed by some of the heaviest hitters, like Walmart (WMT), Gap (GPS), and Best Buy (BBY).

That stands in contrast to some of October’s winners. One of the biggest was McDonald’s (MCD), which stunned investors by posting a profit this quarter for the first time in nearly 2 years. One of the core differences between McDonald’s and the rest is that McDonald’s is cheap and ubiquitous. It’s where people go for lunch when they have a little bit of extra money, but not enough to spend on luxury goods.

Two other winners, Amazon (AMZN) and Mattel (MAT) are both in the same boat as McDonald’s, at least when it comes to consumer spending. Shopping and toys are small luxuries that are hard to cut out of your routine, so it makes sense that they would float to the top when it comes time to look at quarterly earnings.

At first glance, Walmart would seem to fall into the same group of successful companies. After all, it’s not like they specialize in high-end goods. People go there to shop all of the time. If it were just domestic sales to consider, Walmart would actually be doing pretty well. But they’ve expanded overseas where the financial setbacks are even worse. As bad as the American economy is right now, it’s much worse in Europe and most of Asia. Overseas sales have been dragging Walmart’s share prices down.

So, the problems with consumer spending are systemic. They’re caused by stagnant wages and rising commodities prices, and they don’t seem to be in any position to change any time soon. What does that mean for America? Well, for one it may mean that the Fed won’t act this year to raise the prime rate. And secondly it means that many consumer staples like Best Buy (BBY) will have a lackluster holiday season.

When you’re investing this holiday season, keep in mind that consumer spending isn’t what it used to be.
Published on Oct 31, 2015
By Aaron Phillips
Aaron Phillips is a financial researcher and journalist based out of Michigan. He regularly writes the IG Daily and IG Weekly columns.

Copyrighted 2016. Content published with author's permission.

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