Key reports are due this week involving the retail and housing sectors. The resurgence of consumer and housing activity since the depths of the financial crisis has been a slow grind. Updates on both help to assess where the recovery stands. Along with these reports, there's congressional testimony on tap from Federal Reserve Chairman Ben Bernanke.
Consumers fuel gains in both housing and retail sales
A top retail expert says consumers are beginning to splurge again. An update on the continued rebound in the housing market.
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Mark Hamrick: From Bankrate.com, this is "Your Money This Week." I am Mark Hamrick, reporting from Washington. In the coming week, we have key reports on retail sales and on housing, both housing starts and a gauge of homebuilder sentiment. If the experience of the financial crisis told us anything, it is that housing and the consumer are both key to a well-functioning economy. So as U.S. growth continues to proceed at a so-so pace, what is going on with housing? And are shoppers really feeling their oats again, having weathered the worst downturn since the Great Depression? We will talk with two experts who will fill in the blanks. We will learn some surprising things about both of these important areas. In our first segment, it is all about the consumer and the retail sector, which truly has made a science of monitoring, engaging and selling to the consumer. Whether grocery stores, big-box stores or a store at the mall, retailers are expert at trying to gauge what we want and then trying to sell us just a little bit more. And we hear next that while there is still a long way to go to get back to pre-recession levels, some consumers are feeling their proverbial oats again. We spoke recently with Marshal Cohen, chief industry analyst with the NPD Group in Port Washington, N.Y., and I asked with the stock market rallying and home prices on the rise, whether that has been translating to better spending by us -- in other words, consumers.
Marshal Cohen: Consumers tend to spend at different levels. One level is out of necessity. The other level is out of desire. And when you have the stock market doing well, you have the housing market, which always gives consumers a lot of confidence that the economy is in a much healthier place, spending on desire or spending on impulse increases. And that increase is where growth comes from. In other words, if a consumer is only buying replenishment items or necessities, we don't get growth at retail. When they buy on desire and they buy on impulse, that's when we get growth, and that's exactly where we're at. We are at the beginning stages now of consumers feeling pretty comfortable that the recovery is well on its way.
Mark Hamrick: And does that impulsive buy exhibit itself across the retail spectrum everywhere from, let's say, luxury goods to even the grocery store?
Marshal Cohen: What you see are different levels of response by consumers. It generally starts in the auto industry; a lot of times it's a really good indication. When you have the average consumer driving around in an 11-year-old vehicle, that sounds like a really long time to go without a new car. Well, we're starting to see that number accelerate again, which is a very important thing, which is why you see the auto industry picking up. And sometimes, simple things such as the grocery business -- instead of only buying the necessities, consumers start buying some of those fun items again. They start buying some of the extra items in the grocery store like some of the sundry items, not just food-related. So they might get a new pot or a new pan or a new dish towel. And that translates to increases at the register at the grocery store. And that certainly evolves into fashion. Recently we just finished our study for the back-to-school season, and you begin to see parents letting kids be very much a part of the purchase equation again, meaning letting them pick the stores where they want to shop. And of course, kids will tend to want to shop in a more expensive store than a less expensive store, and that bodes well for growth.
Mark Hamrick: And we know that obviously retailers like Wal-Mart were at once both a beneficiary and to some degree a victim of the recession in the sense that people at the lower end of the spending spectrum were less able to purchase, but yet people were more cognizant of shopping for value. As we have seen this perhaps rising tide lifting all proverbial retail boats, has it been evenly distributed in the sense of all kinds of retailers in the business benefiting?
Marshal Cohen: Well, all retailers are benefiting. It isn't quite as proportionate as one would think. The lower-income consumer still tends to be lagging a little bit behind the luxury consumer, and that has everything to do with the fact that there is just that much more discretionary income in the luxury consumer's hands. And that market is clearly running further ahead in the growth rate. And in many cases, it's an early indicator that the market is getting better, and retail is getting healthier. And that's exactly where we are right now. While we're getting growth from many, many different levels of retail, the luxury market is growing at a better rate.
Mark Hamrick: Where are we relative to, let's say, pre-recession levels with the retail business?
Marshal Cohen: We haven't quite caught up to that growth rate. Before the recession, we were hearing about 5 and 6 percent growth per month per industry, and there were some industries that were growing in double digits. What we're seeing now is we're seeing very select categories within industries, so for example, mobile phone cases growing at very high double-digit growth rates, where we're not seeing all of every kind of electronic product growing at that level. Pre-recession, things were growing double-digit almost everywhere, and we saw businesses growing from a minimum of 5 percent, in some categories even higher. We are not quite there yet, nor will we get there that quickly because it's not like turning something on and off. This is about waiting for it to get hotter or colder, almost like the faucet in your bathroom in the morning; you don't just have instant hot water. We have now seen the recession kind of go and fall behind us, but it takes a lot longer for a recovery to kick in and occur than it does for the economy to drop off. It drops off a cliff, and it's a slow, gradual climb uphill to recover.
Mark Hamrick: I think that during the recession there was a fair amount of thinking that, let's say, human behavior, particularly as it relates to saving and spending, would be changed forever. And that's obviously an ambitious projection. What is your sense about the lasting impacts on consumer behavior from the recession, if any?
Marshal Cohen: What we generally see is a change in behavior for a period of time. The drop-off happens very quickly. So you get consumers when they cannot afford to spend, will stop spending right away. They will then start to fall back. Particularly American consumers, we are a very forgiving and forgetful nation. We tend to forget how tough it really was during the recession, and what happens is the consumer will start to fall back into their other pattern, but they won't necessarily get to the point where we were. Keep in mind, the amount of discretionary funds that the consumer had before the recession was astronomically high, and a lot of it had to do with the whole banking industry injecting so much credit into the market, whether it be for housing values or even for credit card opportunities. You could walk into a store, and they would offer you a credit card right there on site. We were almost out of control to a certain degree. So money was so abundant, pre-recession. Those spending habits won't return. But what will return is the desire for the consumer to treat themselves every once in a while and splurge, and that's what we're starting to see the consumer think about again.
Mark Hamrick: Obviously, when we're monitoring the economy, there are a lot of things up in the air, and here we are in the midst of summer now speaking during the month of July. We are getting some retail numbers for the month of June soon. What is your sense about how retail has been doing and retail spending, retail sales have been doing in the recent past?
Marshal Cohen: When you look at how the consumer has really driven this recession to become something in the rearview mirror, it's really been consumer-driven. Very little has been done to support it. In recessions past or in even economic downturns in the past, there was stimulus that was done to help the consumers spend. If you remember in prior administrations, there were rebate checks, there were tax rebates, there were tax breaks, there were all kinds of incentives to try to help stimulate consumer spending. This particular recession, it was left up to the consumer to kind of work their way through this on their own. And recognizing that, if you really think about that, the power of the consumer in being able to drive us out of this recession -- while it has taken longer, albeit by themselves -- has shown really how strong the consumers' ability to be able to drive the economy is. And what that does is it creates an even greater level of stability and strength going forward. So while we're getting slow growth, it's much healthier than the growth that we've had in the past that was stimulated by other outside influences. This is clearly consumer-driven and consumer-supported, and it's very important to recognize the stability that that creates.
Mark Hamrick: So it's organic growth, in a sense.
Marshal Cohen: Absolutely, yes. This is not something that has come by trying to force the consumer to spend. This is almost with the consumer saying, "I don't want to spend, but I'm willing to do it because I feel more confident." And we have seen almost month-after-month-after-month gains, which is very different than what we have seen in the past few years, which was up, down, up and down, up and down. That roller coaster is starting to now just become a gradual upclimb, which is a much healthier way to grow.
Mark Hamrick: Obviously, online sales, online purchases are becoming increasingly important, and I think over time there has been the perception that those sales tend to cannibalize what occurs in the so-called brick-and-mortar space. Is that accurate? And if so, would it be expected to continue?
Marshal Cohen: Well, a consumer still only has X amount of money in their pocket. So if you buy something online and you literally don't have to take the money out of your pocket, you're taking the money out of your account from somewhere -- putting it on a credit card or taking it out of your checking account directly. So the money isn't greater just because we're spending more online. So the answer is, is it cannibalizing brick and mortar? To many degrees, yes. This is about market share rather than store share. The stores don't mind selling online versus in-store. They prefer to sell in-store because they have a greater chance of impulse purchase, which is why you see some retailers constantly trying to drive you to the store to make the purchase, either through better prices or through saying, "Order online, and pick it up in the store." They want you in the store because you tend to buy more than just what you went in for. When you shop online, you tend to shop for the item that you are spending time looking for and surfing and searching, and then once you find it, you don't keep looking all around all over the place. You can't wait to check out and get out. So what you find is it's a different type of shop. But yes, it does cannibalize some of the retail business that you would get if you're selling on your own website compared to your own store. Now, what happens is, this has become a shares war, meaning everyone's now trying to get more than their fair share of their customers to come to their site or to come to their store, which means they become much more concerned about getting their competitors' customer than worrying about getting their customer to shop either online or in the store. That, they're willing to do. But they're also trying very aggressively to get their competitors' business from them.
Mark Hamrick: Marshal Cohen, thanks so much.
Marshal Cohen: My pleasure.
Mark Hamrick: Marshal Cohen. He's chief industry analyst with the NPD Group. He joined us from Port Washington, N.Y.
Mark Hamrick: The housing market was the seismic equivalent of the San Andreas Fault for the 2007-2008 financial crisis, and the quake that was felt in the U.S. and global economies was the big one. Among the hardest-hit businesses was that of home building, and so it's a good time to see where we stand now all these years later. We checked in recently with David Crowe. He's chief economist for the trade group the National Association of Home Builders. Builder confidence has returned to pre-recession levels. I asked David, how much more can confidence rise, and how much better will the housing market be doing as we proceed.
David Crowe: Well, I think the builder confidence will continue to rise, as will the overall housing industry, on a very modest pace. We still have a lot of head winds in front of us. It's difficult for builders to get enough labor to start new homes. Buyers still have difficulty getting mortgages. But all of those things are slowly, slowly resolving themselves. So I continue to see a good future, just not a real sense of rapid growth.
Mark Hamrick: Now you referenced head winds there. Low interest rates have been a tail wind so far, but we've seen a rapid increase in interest rates recently. Is that a head wind at all at this point?
David Crowe: I'm not counting on that being a significant head wind and for the simple reason that while they did increase dramatically in a very short period, they're still really low by historic standards. And so affordability should still be achievable by a large majority of potential homebuyers. The difficulty in mortgages has not been the price of the mortgage. It's been the availability. And that still remains the larger of the impediments. The fact that underwriting standards are very restrictive, and only those with really good credit histories are typically able to get a mortgage.
Mark Hamrick: Now as we know, among the issues that contributed to the crisis, which began as a housing crisis, was overly lax lending standards. We've obviously seen some tightening since the crisis in that regard. You were just referencing that. And then perhaps we've seen easier access to credit from the worst of the crisis. Where would you say we are now with that, and what's your expectation in terms of what people can expect going forward -- perspective borrowers or home sellers -- as to the access to credit in the future?
David Crowe: I am counting on some relaxation in the overly tight credit standards. I certainly agree with you that we got to a point where they were way too loose, and people were borrowing more than they could accommodate, at least some people. And so that led ultimately to the collapse. But I think we've overdone that safety and have increased the inability for people to get mortgages more than necessary. Some of it is just due to a lack of certainty. We've changed a lot of rules over the last several years about what financial institutions can do, how much they can lend, what they have to do in order to complete that mortgage, how much money they have to hold back in capital reserves even if they sell the mortgage. Those rules are slowly being clarified and finalized along with, not the certainty about what's going to happen to Fannie and Freddie, but at least a little more clarity that they will exist until something better is designed. All of those things mean, I think, we are moving towards a more stable mortgage market and likely a little less aggressive tightening than we've had up to now.
Mark Hamrick: On the part of young people, some of whom don't have great access to jobs these days, and there's been a relative diminution in growth in incomes since the financial crisis, we know there was this dynamic around that time, before the crisis, of McMansions. There seemed to be a trend, at least within certain income groups, to try to emulate the wealthy. Has there been a new spirit of economizing on the part of purchasers of new homes, or do you see that getting back to something like the way it was before?
David Crowe: Well, we sort of had two forces there that are not necessarily in conjunction with each other. I agree that those that are bound by perhaps a little more restrictive budgets than they were before, who have a student debt, for instance, whose income growth path isn't as aggressive as maybe their older brothers and sisters or the generation before them, and all of those are contributing factors to being a little more careful about a home purchase. On the other hand, this tighter mortgage underwriting condition has meant that only those that get through that portal are currently buying homes, particularly new homes. And so we've actually seen the size of new homes return to the sizes they were before the recession started and in fact even growing a little larger than that. I don't think that's an indication that people are back to buying larger and larger homes. I think rather it's an indication of a select group of people who are buying right now. And because they tend to have better credit ratings and higher incomes, they're buying the larger homes that you would normally expect them to buy.
Mark Hamrick: David, obviously your group represents builders of single-family homes as well as so-called multifamily units that can include apartments and condominiums. What about young people and their, let's say, willingness to live in multifamily units. Is that something also because of the migration from rural areas to cities that seems to be a long-lasting trend, that we'll see more and more of that?
David Crowe: Well, right now we are seeing a significant boom in construction of apartment buildings, and due to two reasons. One, this fact that younger people are having a greater struggle to make it into homeownership, so they are choosing renting because of their slower income growth and their higher debt burdens. So multifamily construction has been very healthy recently due to that trend. And we have seen some return to greater-density living, to urban living where access to nonwork-hour activities are also easy, so you could get to restaurants and other social activities that particularly younger people would desire. And I suspect some of that trend will continue. But it is pretty clear that homeownership is still the ultimate destination for a large majority of those young people. It's just not available to them right now because of all those temporary reasons. So I think we'll continue for a while to see a greater reliance on apartment buildings, apartment renting, urban living, for particularly the newest-formed households. But I don't think that's a permanent change. I think that's just part of the transition from where we were to where we're going.
Mark Hamrick: And then finally, on the other end of the spectrum, speaking of where we're going, we have a graying population, and many of those people will be wanting to downsize. How does that affect the housing dynamic of the future?
David Crowe: Well, it does affect the dynamic because as everyone knows, this baby boom generation is a larger number of people than we've had in the past. So whatever they do has a larger effect upon their consumption patterns. And it is the case that as people age, they either downsize, sometimes wanting to move to a single story, for instance, for greater mobility, and so that will affect the purchases of the, say, 55-plus generation. However, you do have to remember that that still is a minority of all 55-plus. Most 55-plus people don't move. They stay exactly where they've lived all their lives, where they've raised their children, where their family is still located. So the only reason to note that dynamic as a force on housing is simply because it's a larger absolute number coming from a larger group of people. But the percentage change is still in the neighborhood of 15 to 20 percent of that group actually decides to move either downsizing or just simply to a different place.
Mark Hamrick: Fascinating, David. David Crowe, thanks so much for your time.
David Crowe: Sure, Mark. Glad to do it.
Mark Hamrick: David Crowe, chief economist with the National Association of Home Builders. He spoke with us from his office in Washington.
Mark Hamrick: This week in business history we look at parking meters. One can only guess how much parking meters have collected over the years since the purported first installation of a meter July 16, 1935. It took place in Oklahoma City. Of course, those first models accepted coins, which had to be collected by somebody. The term "meter maid" referencing female parking attendants was popularized by the Beatles' tune "Lovely Rita." In recent times, though, smartphone pay applications have diminished the need to have those coins ready to feed the meters.
Mark Hamrick: You've been listing to "Your Money This Week." ITunes listeners, if you enjoyed this podcast, please rate and subscribe to our program. We have only been doing this for a short time, and we're still looking to help get the word out. For more on this and other personal finance issues, visit Bankrate.com, and you can follow us on Twitter @Bankrate. Our editor-in-chief is Julie Bandy; managing editor, Katie Doyle; and of course, producer Lucas Wysocki for his expertise in the studio. I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
Among the events scheduled this week:
- Fed Chairman Ben Bernanke testifies to House Financial Services Committee, Wednesday at 10 a.m. (all times Eastern)
- June retail sales report from the Commerce Department, Monday at 8:30 a.m.
- June consumer price index report from the Labor Department, Tuesday at 8:30 a.m.
- Builder sentiment reading from the National Association of Home Builders, Tuesday at 10 a.m.
- June housing starts from the Commerce Department, Wednesday at 8:30 a.m.
- Fed's Beige Book report Wednesday at 2 p.m.
Spotlight on Bernanke, asset purchases
When Federal Chairman Ben Bernanke spoke to Congress in May, he floated the possibility asset purchases could be scaled back later this year. Since then, there's been a great deal of speculation when that might actually happen. The $85 billion in monthly purchases -- widely known as QE3, short for the third round of quantitative easing -- began last September with the goal of giving the economy momentum and healing the job market.
Lawmakers will have a chance to press the questions surrounding asset purchases again this week. Bernanke begins two days of semiannual testimony on monetary policy before the House Financial Services Committee.
He follows that with a Senate Banking Committee appearance Thursday. Along with the outlook for further asset purchases, it is a good bet that Bernanke's own tenure as chairman will be fodder for a question or two. His term ends in January. President Barack Obama said in a television interview recently that Bernanke "already stayed a lot longer than he wanted or he was supposed to." That seemed to end any thought that Bernanke might be in line for an extension.
While Vice Chair Janet Yellen has been seen as likely successor, there has been a flurry of reports indicating that former Treasury Secretary Larry Summers is interested in the post and might get serious consideration by Obama.
The consumers' pulse
The first report of the week covers June retail sales. The government reported a May gain of 0.6 percent. Jeffrey Rosen, chief economist for Briefing.com, looks for a solid follow-up, helped by improving employment conditions. Says Rosen, "A strong June employment report showcased the biggest one-month increase in aggregate earnings since February, which we expect to result in another month of above-trend retail sales growth."
That's consistent with the longer-term comeback mounted by consumers. Retail expert Marshal Cohen with The NPD Group says, "While we're getting slow growth, it's much healthier than the growth that we've had in the past that was stimulated by other outside influences. This is clearly consumer-driven and consumer-supported." He says such organic growth adds important stability to spending.
Building a foundation in housing
Tandem reports on housing are slated this week, first on the mood among builders and then on new construction, or starts. When the home builders' trade group reported last month on builder confidence, the reading was the strongest since April 2006.
David Crowe, chief economist for the National Association of Home Builders, sees further improvement in the offing. That's despite some challenges. Crowe says, "It's difficult for builders to get enough labor to start new homes. Buyers still have difficulty getting mortgages. But all of those things are slowly, slowly resolving themselves," he adds. Crowe sees "a good future, just not a real sense of rapid growth."
Briefing's Rosen sees some cross-currents at play with housing starts. "We expect the need to increase inventories of new homes will cause a two-month decline in single-family construction to reverse in June," says Rosen. He adds that the "gains, however, may be offset by weaker multifamily starts as that sector cools off following several months of above-trend gains."
This week in business history: Parking meters
One can only guess how much parking meters have collected over the years since the purported first installation of a meter July 16, 1935. It took place in the near-center of the country, in Oklahoma City. The first models accepted coins, which had to be collected. The term "Meter Maid," referencing female parking attendants, was popularized by the Beatles' tune "Lovely Rita."
Smartphone apps have since diminished the need to have coins handy to feed the meters.
Follow me on Twitter @hamrickisms.