Why Gallup’s consumer spending measure affects labor markets

Market Realist

Must-read preview: Key indicators for the 1st week of September (Part 2 of 11)

(Continued from Part 1)

Gallup’s consumer daily discretionary spending release

Each month, Gallup releases its estimate of daily discretionary expenditure by the average American. The expenditure estimate excludes regular household bills and big-ticket items like refrigerators and cars. August’s report will be released by Gallup on Tuesday, September 2.

Consumption is the largest component in the gross domestic product (or GDP), making up over two-thirds. Changes in consumer spending have major implications for economic growth, impacting both small- (IWM) and large-cap stock (IVV)(SPY)(QQQ) and bond (TLT) ETF investments.

Stocks, especially in the consumer discretionary sector, usually rise when consumption grows. The iShares Russell 2000 ETF (IWM) invests primarily in small-cap stocks, tracking the Russell 2000 Index.

Highlights from July’s report

  • Average daily consumer expenditure in July 2014 rose to $94, compared to $91 in June and $89 last July. The estimate was based on ~15,000 daily interviews with American adults, conducted by Gallup in July.
  • Higher-income Americans continued to fuel the increase in spending. Americans earning $90,000 or more annually increased their average spending from $157 in June to $190 in July.
  • On the other hand, average daily expenditure for middle- and lower-income Americans declined in August from $79 in June to $75 in July.

What to watch out for in this month’s release

Consumer spending across all income levels should benefit from back-to-school shopping in August. There could be a one-off surge in August as a result. The steady improvement in the labor market should also ensure healthy spending levels.

Consumer spending overall still remains weak, though. This year, consumer spending has been flat to moderately positive, except for holiday-induced surges in spending. Gallup’s U.S. consumer spending measure still lags pre-crisis levels, when levels of over $100 per day were more frequent.

Also, all income levels haven’t seen an increase in spending. Middle- and lower-income Americans are a larger group than higher-income Americans. Spending for the former declined last month. This may imply economic uncertainty about job prospects.

On the other hand, manufacturing sector indicators have given more unequivocal growth signals. Read about the purchasing managers’ index in the next part of this series.

Continue to Part 3

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