U.S. consumer spending rose the maximum in almost a decade in March as households increased purchases, quelling concerns about the economy’s health. Price pressure, in the meanwhile, was under control, as a key inflation measure increased the slightest in 14 months.
This calls for investing in consumer discretionary companies that are poised to grow on signs of consumer spending strength.
U.S. Consumer Spending Roars Back
U.S. consumers ramped up spending in February and March, a sign that they are pretty confident about their well-being. Consumer spending, which accounts for more than two-third of economic output, increased 0.9% in March. This was the largest monthly increase since August 2009, according to the Commerce Department.
Spending rose 0.1% in February. The release of the February data got delayed due to the longest-ever partial federal government shutdown that ended on Jan 25. By the way, data for January was revised up to show a 0.3% rise in spending instead of the earlier reported growth of 0.1%.
When adjusted for inflation, consumer spending increased 0.7% last month, while the real consumer outlays somewhat remained unchanged in February. Nonetheless, March’s uptick in consumer spending levels suggests accelerated consumption in the second quarter.
Lest we forget, consumer spending rose a meager 1.2% in the first quarter, compared with 2.5% gain in the preceding quarter. Then again, the surprise 1.6% uptick in March retail sales indicates possibilities of higher consumer spending in the days ahead. Headline retail sales saw the largest monthly increase since September 2017, driven by sales of motor vehicles, petrol and clothing, which shows that consumers continue to support the economy.
What Drove Consumer Spending?
Consumer spending was largely driven by strength in the labor market. According to the Bureau of Labor Statistics, the economy added 196,000 new jobs in March, exceeding analysts’ estimates of around 179,000. In fact, hiring sped up by an average of 180,000 in the first three months of this year despite questions about employers’ ability to find skilled labor.
Meanwhile, the jobless rate remained at 3.8% last month, slightly above a 49-year low. The real unemployment rate, including those who are underemployed and discouraged, also known as the U6 rate, is down from 7.9% a year ago. At the same time, wage growth kept its momentum, ensuring that pay is increasing at a faster pace than inflation.
Easing Price Pressure
Talking about inflation, the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, was a little changed in March after edging up 0.1% in February. The so-called core PCE index, thus, was up 1.6% on a year-over-year basis last month, the smallest increase since January 2018.
The broader PCE index rose 0.2% in March compared to the previous month and jumped 1.5% from a year earlier, but both fell below expectations. In fact, the Fed’s preferred price gauge remained well below the central bank’s target of 2%, but consumers certainly won’t be complaining. After all, rise in prices of essential goods and commodities impacts the cost of living and the propensity to spend.
Top 5 Gainers
Courtesy of the rise in household spending, consumer discretionary companies are poised to benefit the most as outlays play a major role in determining their revenues. We have, thus, selected five consumer discretionary stocks that flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Lululemon Athletica Inc. LULU designs, distributes, and retails athletic apparel and accessories. In the last 60 days, 14 earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for current year earnings has moved 7.3% up during the same time frame. The stock’s expected earnings growth rate for the current year is 22.7% compared with the Textile - Apparel industry’s projected rally of 11.1%.
Rent-A-Center, Inc. RCII leases household durable goods to customers on a rent-to-own basis. In the last 60 days, two earnings estimates moved higher, while none moved lower for the current year. The Zacks Consensus Estimate current year earnings has moved 3.2% up during the same time frame. The stock’s expected earnings growth rate for the current year is 80.2% compared with the Consumer Services - Miscellaneous industry’s estimated rally of 6.1%.
SeaWorld Entertainment, Inc. SEAS operates as a theme park and entertainment company. In the last 60 days, five earnings estimates moved up, while one moved lower for the current year. The Zacks Consensus Estimate current year earnings has moved 7.8% up during the same time frame. The stock’s expected earnings growth rate for the current year is 140.4% compared with the Leisure and Recreation Services industry’s projected rally of 10.8%.
Clarus Corporation CLAR focuses on the outdoor and consumer industries. In the last 60 days, two earnings estimates moved higher, while none moved lower for the current year. The Zacks Consensus Estimate current year earnings has moved 2.6% up during the same time frame. The stock’s expected earnings growth rate for the current year is 25% compared with the Leisure and Recreation Products industry’s estimated rally of 10.6%.
G-III Apparel Group, Ltd. GIII designs, sources, and markets women's and men's apparel. In the last 60 days, five earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate current year earnings has risen 5.1% during in the same time frame. The stock’s expected earnings growth rate for the current year is 15.4% compared with the Textile - Apparel industry’s projected rise of 11.1%.
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