Why June records the largest drop in consumer spending

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Key economic indicator releases that could impact ETF investments (Part 2 of 8)

(Continued from Part 1)

June records the largest drop in consumer spending

Gallup’s self-reported consumer spending poll for the U.S. in June was released on Monday, July 7.

Gallup tracks daily discretionary expenditures through 13,000 interviews with American adults. It surveys respondents on their discretionary spending expenditure the previous day. The expenditure estimate doesn’t include regular household bills or what consumers spent on big-ticket items like refrigerators or cars.

Highlights from June’s report

Average consumer spending for Americans in June fell back to $91 on an average per day, after a six-year high of $98 in May. This month’s $7 drop is one of the largest recorded by Gallup during this time of year since 2008. However, the average spends remained similar to the average spends in June, 2013, of $90 per day.

This reading for June suggests a mixed bag for the economy. While it represents a much higher level of consumer spending than the $60–$70 averages found for much of 2009–2012, it also represents the first decline in the monthly average since January.

The drop in consumer spending among all Americans can largely be attributed to upper-income Americans spending less in June. Americans living in households with $90,000 a year or more in income reported spending on average $189 a day in May. This dropped to $157 in June—similar to this group’s average spending in April. On the other hand, consumer spending among middle and lower-income Americans was steady in June.

Investor’s takeaway

Consumption is one of the most important components of U.S. gross domestic product (or GDP). It makes up over two-thirds of the economy. An improvement in economic outlook, combined with job market improvements and consumer sentiment, is generally bullish for the stock market. It especially helps consumer discretionary stocks like the Gap (GPS) and Fossil.

Consumer spending directly impacts the retail sector, with increases or decreases in discretionary spending likely to increase or decrease top-line results for retailers. The Market Vectors Retail ETF (RTH), which tracks the Market Vectors U.S. Listed Retail 25 Index, is designed to track the overall performance of the 25 largest publicly listed retailers in the U.S. The top holdings in the exchange-traded fund (or ETF) include the S&P 500 Index (SPY) components Walmart Stores Inc. (WMT), at 10.66%, and Amazon.com Inc. (AMZN), at 9.48%.

Another important macro indicator that released in the past week was the National Federation of Independent Business (or NFIB) Small Business Optimism Index. The next section in this series assesses small business optimism towards the economy in the month of June.

Continue to Part 3

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