The Return of the American Consumer?

What to make of August retail sales?  Both same store sales and Commerce Dept. sales showed roughly a 3% growth rate over 2009, beating the modest expectations. Does this mean that the US Consumer is back to its spendthrift ways?  Not exactly….

Sure the August results are a positive sign after the disappointing May through July, but September consumer confidence measures have recently fallen back to early 2010 levels and most surveys show shoppers to be highly budget conscious.

A Tale of Two Consumers
If the consumer is so cautious, how is it that Banana Republic is now the present star of Gap’s retail portfolio?  Why are Nordstrom’s full-line stores are reporting strong sales, while the discount Rack stores are struggling?   Does it make sense that in September, the Fed’s 12 regional districts indicated wide differences in the strength of consumer spending, by region?   How is it that Best Buy recently reported a decrease in customer traffic, but an increase in the average ticket $?

Could this be a tale of two consumers?

We all know that the jobs losses in this recession have hit the less-educated workers, the hardest.  Further, the ranks of the long-term unemployed are at record levels.  Meanwhile, many employers with job openings for highly-skilled, specialized workers complain of a lack of qualified candidates- I’ve heard that complaint increasingly from my clients.  Also, Wall Street bonuses are recovering to pre-recession levels and many boutique purveyors of luxury goods are seeing a strong recovery.  Further, according to the US Census Bureau, income equality has reached an all time high.

Undoubtedly, the consumers who are unemployed, heavily indebted, or unsure about their futures are continuing to spend at the low recessionary levels.   As a result, in April through July of 2010, consumer spending was still below the prerecessionary levels of 2008. However, many highly skilled workers feel a much stronger sense of job security and are spending more on discretionary items.   Those workers are also in tune to the broader economy, which explains why consumer spending has trended very closely to the stock market performance (see below).   This “Tale of Two Consumers” may explain the strong sales performance of certain luxury categories, consumer electronics (tablet computers, mobile devices, etc.) and geographies, despite the sluggish general economy.

Consumer Spending vs. the Stock Market
In fact, the “Tale of Two Consumers” concept is supported by the unusually high correlation between stock market performance and retail sales in 2010.  Most historical studies have indicated that wages, unemployment and food/gas prices have had the largest impact on consumer spending — largely because they impact the average consumer’s monthly budget.  The stock market is often viewed as a secondary factor; the theory is while 401(k) balances are important to consumers, they have less of an impact on monthly budgets.  However, 2010 appears to tell a different story.  While wages and unemployment have been stagnant, there is a high correlation between the stock market and consumer spending
While this could be explained by the market reacting to consumer spending data, it could also be explained by this 2nd strata of consumers (highly skilled/financially sophisticated), whose discretionary spending is influenced by the stock market.

Based on this data, the macroeconomic view of “the American Consumer” as a single entity misses the point.
What does this portend for holiday sales?  How do retailers place their merchandising bets to meet the needs of both consumers?  Who will be the winners and losers?