Wealth Effect Drives U.S. Consumers to Keep Spending

 

EARNINGS Updated August 13, 2013, 7:18 p.m. ET

Wealth Effect Drives U.S. Consumers to Keep Spending

Retail Sales Rise 0.2%, but Core Climbs at 0.5% Pace

By BRENDA CRONIN and SHELLY BANJO CONNECT

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%, 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.

 

 

Kenosha News/Associated Press

Heather Taylor shops for school supplies at Target with her children in Kenosha, Wis., on Monday.

 

Shoppers are “seeing the value of their homes and retirement accounts go up,” said John Venhuizen, chief executive of Ace Hardware Corp., an Oak Brook, Ill., retailer cooperative with 4,700 stores globally. “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, he said.

 

Consumers started the year confronted by higher taxes, surging gasoline prices and the impact of federal budget cuts. However, more than halfway through 2013, they are notching the highest confidence levels in years. Economists attribute 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 than we have seen in quite some time,” said Scott Anderson, chief economist at Bank of the West in San Francisco.

 

U.S. Retail Sales

 

Track estimated U.S. consumer spending by type of store.

 

 

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 several high-end 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 such as 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 regions in 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 gas prices—to an average of $3.68 for a gallon of regular from $3.49. (Gas 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 at its highest point in more than five years. The stock market and climbing home prices have played a role. The Dow Jones Industrial Average is up nearly 18% to 15451.01 this year. During the 12 months ended in June, the median sale 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 said, 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 renovation of their Boston home and halting investments in a retirement fund. They are 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., while 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.”

 

Write to Brenda Cronin at brenda.cronin@wsj.com and Shelly Banjo at shelly.banjo@wsj.com

 

A version of this article appeared August 14, 2013, on page A5 in the U.S. edition of The Wall Street Journal, with the headline: Wealth Effect Boosts Retailers.

 

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