Consumer Spending Flat, Saving Grows

Today marks the close of trading for the month of April, and as we talked about yesterday, there has been no shortage of bad news on earnings or economic data. So why would we expect anything different today? This morning there were two economic data points in particular -- March personal income and spending and the economic cost index for the March quarter -- that, in my view, point to continued problems. First, personal income was essentially unchanged month over month. Not terribly shocking given the wage data that we get in the monthly employment report, but today's data, which was the weakest personal income increase since December 2013, should remind us the cash-strapped consumer is alive and well even though consumer spending rose month over month. Despite that modest climb, personal spending in March was the latest economic data point to miss expectations. If you've been keeping score like we have, there have been a growing number of those over the last several weeks. Keep in mind that some of that sequential spending increase could be traced back to the recent climb in gas prices, which per the Energy Information Administration hit $2.66 per gallon, up from the February average of $2.15 per gallon. That, combined with flat incomes, sheds some light on flat disposable income for the month of March. But what we find fascinating is that despite flat income and disposable income, consumers continue to save at greater levels than they did four to five months ago. While it could be lingering weather effects, the recent drop in consumer sentiment could also explain why consumers have become better savers. The looming retirement crisis could also have something to do with it. While some may look to banks like BB&T (BBT) and similar institutions, I continue to favor shares of Morgan Stanley (MS) and TD Ameritrade (AMTD) instead because of the extended interest rate hike timetable. The second piece of data that we received this morning was the first-quarter 2015 employment cost index. While the reported figure that is garnering most of the headlines was the 0.7% increase in wages and salaries compared to the December quarter, the item that caught my eye was the 2.6% year-over-year increase in wages and salaries. This was a far faster rate of increase than we saw in all of 2014's quarterly figures that were in the range of 1.8% to 2.2%. You can chalk that up to minimum wage increases that were put into effect in January, with other states following in February and March. When we put these two reports together, we find that because of flat wages and some higher prices (gas), consumers are not spending as much as expected. When I see that, I tend to get a little wary for restaurant stocks like Red Robin (RRGB), Famous Dave's (DAVE), Cheesecake Factory (CAKE) and the like. At the same time, businesses are contending with higher costs (gas and wages) and -- for those with international exposure -- the dollar, which will continue to impact year-over-year revenue comparisons in the current quarter. While shares of Proctor & Gamble (PG), Clorox (CLX) and even Colgate-Palmolive (CL) tend to jump into my frontal lobe, the international exposure and therefore dollar trends have me staying away for now. Perhaps the smart thing to do is to load up on Church & Dwight (CHD) products and sit on the sidelines for a while as the month of May comes to town.

Consumer Spending Flat, Saving Grows

This is in spite of income problems reflected in reports.

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