By Marek Fuchs
In journalism, three can make a trend, so perhaps we can forgive some in the media for playing as if the consumer is back for good.
This week, after all, we learned consumer confidence rose for the third straight month, up to 81.4 in June from a revised 74.3 in May. Of course, we also found out that first quarter GDP revisions were much lower than expected; consumer spending plays a big role in GDP numbers, accounting for more than 2/3 of U.S. economic activity. The latest report showed consumer spending increased by 2.6%, a fairly moderate pace.
[See related: Are Consumers Confident or Just Less Peeved?]
And the (confusing) beat goes on. The latest, greatest consumer sentiment numbers came in on Friday morning and they were — at least on the surface — good. The final reading of The Thomson Reuters/University of Michigan index on consumer sentiment stood at 84.1 points, edging both the preliminary reading and expectations for the revision by more than a point. But figures on consumer expectations showed a considerable spread in optimism between upper- and lower-income households, rarely a sign of sustainable economic progress. And so another set of numbers arrives and we're no closer to a figuring out the fractured state of the consumer.
Things not always what they seem
For one, while the customer may always be right, consumer confidence numbers are not always what they appear. First off, there are the hairpin turns. Headlines such as Consumer Confidence Climbs to a 5-Year High were the order of the day last November, featuring happy phraseology such as “increasingly upbeat,” “rosier” and “decent footing.” That was followed just two months later by headlines such as Unexpected Backslide in Consumer Sentiment, when the numbers in January marked the second decline in a row and lowest numbers in more than a year. That article deployed the term “negative feelings.” One month’s roses are another’s ashes.
Moreover, world economies are entwined but consumer confidence does not cross borders. This week, at the same time the consumer numbers in the U.S. were relatively strong, this headline emerged: “French consumer confidence at all-time low, outlook bleak.” How long before French – or Chinese, for that matter – consumer despair hits up in America?
There are also intricacies and complexities to consumer confidence numbers that are often ignored. Big items such as cars and building supplies did well lately, while discretionary items such as dining out lagged. This often bodes poorly, indicating that, when not offered easy credit, the consumer is still curled up in a ball.
In fact, any show of life by the consumer in recent years has been largely financed on credit or money saved from temporary measures, such as a decline in prices at the gas pumps. There are also the drivers of uncertain lifespan, including the conspicuously large increase in housing prices over the past year, which could be a mere function of the Federal Reserve’s easy-money policies. And we all know "fear the taper" has been a bit of a rallying cry among investors over the past month.
What is certain is that wage gains have not been contributing to consumer confidence. That’s probably why the numbers have been – and will continue to be – so fickle. Lasting drivers of the consumer economy – e.g., jobs – are largely absent from the equation.
And so there we have it. The consumer appears to be in motion, and the media and traders stand to applaud. But then a month or two will pass and the consumer is once again declared a washrag.
With no reliable, internal logic to the macro picture beyond “it’s going to fluctuate,” you must take a particular tact when considering big consumer product stocks: pretend the consumer is not even there. Unhitch your take on consumer-sector stocks from that hunch on which way the buyer will turn next. It’s the right strategy for the time and will often keep you closer to the basic direction the company is moving in.
Barnes & Noble (BKS), for example, is dead or dying for reasons that go well beyond consumer mood. McDonald’s (MCD), by contrast, is no disaster – but is suffering from a great deal of competition and food tastes that are tilting toward more healthful. Coke (KO) also operates in a society that is favoring more-natural items over chemicals that dissolve teeth, but it has been doing well in developing countries, from Mexico to Russia. Proctor and Gamble (PG), by contrast, has been stumbling in developing countries, which make up nearly 40% of sales. They’ve had to compensate by cutting expenses to ribbons. Kimberly Clark (KMB) has done a bit better in developing countries and may have a better product pipeline. Apple’s (AAPL) product pipeline (or lack thereof) will determine its fate more than the latest tick up (or lack thereof) in consumer confidence.
[See related: Barnes & Nobles, the Final Chapter?]
The point is this: Focus on a re-dedication to basics, even in the big consumer stocks. Don’t think of them as riding in the saddle of consumer sentiment. There are, in the grandiloquent words of former Defense Secretary Donald Rumsfeld, “known unknowns.” Consumer confidence numbers, which swirl this way and that, should be among the best known of the unknowns.
Treat them as such – and focus on the specifics of the company, giving the macro picture a ceremonial shrug before moving on quickly to the underlying fundamentals.
Marek Fuchs was a stockbroker for Shearson Lehman Brothers before becoming a journalist who wrote The New York Times' County Lines column for six years. Fuchs speaks regularly on business and journalism issues at venues ranging from annual meetings of the Society of American Business Editors and Writers to PBS to National Public Radio. His recent book, "Local Heroes: Portraits of American Volunteer Firefighters," earned widespread praise. He is on the writing faculty at Sarah Lawrence College. When Fuchs is not writing or teaching, he serves as a volunteer firefighter. You can contact him on Twitter: @MarekFuchs.
- consumer confidence