Daily Gains Letter

Did Wal-Mart Just Say Consumer Spending Is Declining?

By for Daily Gains Letter |

Consumer Spending Is DecliningIt’s not a hidden fact that the biggest force that drives the U.S. economy is consumer spending. If it declines, you can say the odds of a slowdown in the U.S. economy are increasing. Consumer spending roughly makes up 70% of U.S. gross domestic product (GDP), so you can imagine how a small change can make a huge difference.

Well, this is exactly what the U.S. economy is going through. Consumer spending is at stake, so it shouldn’t be a surprise that economic growth is on the line.

One of the key indicators of consumer spending is consumer confidence. The logic is very simple: if consumers feel good, they will go out and spend. When paranoid or afraid of change, they will do the opposite and step back, reducing their spending.

The Conference Board Consumer Confidence Index, a key indicator of where consumer spending is headed, declined in September, dragging down almost 2.5%, from 81.8% in August to 79.7% now. (Source: “The Conference Board Consumer Confidence Index Falls Slightly,” Conference Board web site, September 24, 2013.)

Unfortunately, we are already starting to see early indications of deteriorating consumer spending.

In August, new orders for durable goods in the U.S. economy, excluding transportation, declined 0.1%. At the same time, the inventory levels at the manufacturers of durable goods continue to increase. In August, they increased $0.3 billion, or 0.1 %, to $379.1 billion; this was the highest level since this data was first published. You don’t want to see this combination of declining orders and increasing inventory when you are hoping for economic growth. (Source: “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders,” U.S. Census Bureau web site, September 25, 2013.)

It doesn’t end here.

We are hearing once again from companies on key stock indices about how dismal consumer spending really is. A recent report from Bloomberg stated that Wal-Mart Stores, Inc. (NYSE/WMT) reported that it will be reducing its inventory levels for the third and fourth quarters of this year due to the company missing past sales targets and the resulting abundance of goods. (Source: “Wal-Mart Cutting Orders as Unsold Merchandise Piles Up,” Bloomberg web site, September 25, 2013.)

While there has been concern about the validity of the Bloomberg report, that doesn’t appear to be swaying investors who don’t seem to be very pleased with Wal-Mart’s stock. Just look at the chart below.

Wal-Mart Store Chart Chart courtesy of www.StockCharts.com

As you can see, the stock price has declined and currently continues to follow that trajectory.

To put all this in perspective, all the indicators are suggesting consumer spending is in a somewhat troubled area at the very least. Where will it go? Only time will tell, but if it edges lower from here, don’t be surprised to see the growth rate of the U.S. economy slow down.

For investors, it would mean that those companies that are highly correlated with consumer spending will have trouble seeing growth in sales. One area investors might want to stay away from is the consumer discretionary sector. If we started to see further down ticks in consumer confidence and they pull back on their spending, they will not be buying goods like electronics and flashy gadgets.

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