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VERSACE: Rough report card on back-to-school spending hopes
Question of the Day
With the lackluster July employment report behind us, we are firmly into August and the temporarily slower pace of life as summer vacation season sets in. To others, it means that preseason fall sports are getting under way -- football, lacrosse, field hockey and so on -- and many parents and students have kicked off back-to-school spending.
How big is that spending? According to the National Retail Federation's (NRF) 2012 spending survey conducted by BIGinsight, the average person with children in grades K-12 will spend $688.62 on their young scholars. In total, that spending, according to the NRF, adds up to $30.3 billion. Factor in college, and the combined K-12 and college spending is forecast to reach nearly $84 billion this year. At that pace, back-to-school spending is the second-biggest consumer spending for retailers behind the winter holidays.
Now that all sounds pretty rosy, but a healthy dose of context offers a more sobering take on the numbers. The NRF's nearly $84 billion figure is some 22 percent higher than the $68.8 billion spent last year. Keep in mind that job creation has been roughly the same as last year -- averaging 150,000 to 155,000 jobs per month -- and the unemployment rate has started to climb again.
While consumers will spend -- in many respects they have to as children grow, sports seasons gear up and school supplies are needed -- the recent income and spending reports suggest that they will do so in a more restrained fashion. Over the past several months, data from the Bureau of Economic Analysis point to far more restrained spending as consumers look to save more than spend in the face of minimal growth in disposable income over the past few months.
As we learned in the July jobs survey, the average workweek has remained about 34.5 hours since at least March, and average hourly earnings over the same period have stagnated. In other words, on the personal balance sheet, revenue (or in this case income) is not growing.
On the cost side of the equation, we are starting to hear more companies talk about passing on the brunt of rising input prices to consumers. Given the drought in the Midwest that is driving corn and soybean prices higher, odds are that we will hear more of this talk in the coming weeks and months. Unbeknownst to many, below-normal monsoon rainfall in India is the chief cause of a 7.8 million-ton downward revision in the forecast for global rice production this year, according to the Food and Agriculture Organization of the United Nations.
Although consumers already can feel the pain at the grocery checkout, odds are that food prices will climb even more.
So how will consumers close the income-spending gap?
They will cut back on discretionary spending, buying what they need when they need it, looking for more deals, sales and the like and trying to stretch their dollars as far as they can. To me, this does not bode well for consumer spending on restaurants and impulse items. Rather, eating at home, necessities and other inelastic items such as toothpaste, paper products and so on will continue to receive their share of spending dollars.
To get a better read on what and where consumers are spending, over the next few weeks I will be conducting mall walks around Greater Washington. My expectation is that companies such as Costco Wholesale Corp., Family Dollar Stores Inc., Dollar General Corp. and Wal-Mart Stores Inc. will be among the big winners in this back-to-school season.
I'll share more in the coming weeks as I walk the malls and count the bags.
• Chris Versace is the editor of the PowerTrend Brief and PowerTrend Profits newsletters. Read them at ChrisVersace.com, or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.
© Copyright 2013 The Washington Times, LLC. Click here for reprint permission.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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