The United States Census Bureau reported consumer spending in the U.S. economy—adjusted for price fluctuation—increased by 0.2% in February from the previous month. In January, consumer spending increased by 0.1% after seeing a decline in December. (Source: "Personal Income and Outlays, February 2014," United States Census Bureau web site, March 28, 2014.)
This sent a wave of optimism through the markets. We heard consumer spending is going higher; therefore, the U.S. economy will improve. Buy and buy some more, or you will miss out on future gains was what we were told.
However, I don't think much thought was given to the increase in consumer spending compared to the previous years. Please look at the chart below. It shows the percentage change in the personal consumption expenditure each February over the last four years.
There's a clear trend. The percentage change in consumer spending this past February is the lowest since 2011. But if we were to extend this chart to include the change in consumer spending from December to February, this February saw the lowest percentage change since the same period in 2009 and 2010. This shouldn't go unnoticed.
Going forward, it looks like consumer spending might even decline further. You have to understand that consumers have to be willing to spend; they have to be optimistic to buy. I look at consumer sentiment as one indicator of consumer spending, and it's not looking very promising at this time.
In March, the Thomson Reuters/University of Michigan U.S. Consumer Sentiment Index declined almost two percent. The index fell from 81.6 in February to 80.0 in March. (Source: Mikolajczak, C., "U.S. consumer sentiment falls in March," Reuters, March 28, 2014.)
Other indicators, like the housing market, are showing troubling statistics, as well. Increasing transactions in the housing market can cause consumer spending to increase—homeowners are big contributors to the sale of things like furniture, lawn mowers, home appliances, and so on. My colleague John Whitefoot wrote about this just a few days ago. (Read "What's Handicapping First-Time Homebuyers?") One key point of his article: home sales in the U.S. economy are declining and home buyers are just not as active.
If consumer spending in March shows the continuation of the dismal trend that we see now, it should be taken very seriously. Why? Because consumer spending is a huge factor in calculating U.S. gross domestic product (GDP). If consumer spending declines—or even slows—it can affect the growth of the entire U.S. economy this year.
As this situation develops, investors should keep their eyes on the retailers that sell discretionary goods and the companies that make them. These stocks will be hit the hardest. Consumers usually keep on buying goods that they need no matter the economic climate; however, once they turn pessimistic, they pull back on spending in discretionary goods.
If investors own discretionary stocks, it may be the time to take some profits off the table and increase your cash position—these stocks aren't showing any great future prospects right now.
This article Consumer Spending Growth in February Bad Sign for Investors? by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter.