Thursday, October 21, 2010

Beige Book: Consumer Spending

From the Beige Book:

Retail spending was flat to moderately positive in most Districts, with the exception of the Richmond and Atlanta Districts, which noted declining traffic and sales. Contacts in the Kansas City District noted sales were stronger than expected; back-to-school spending boosted sales in the Philadelphia and Dallas Districts. Retail spending grew modestly in the Minneapolis and San Francisco Districts, and was flat in the Cleveland, Chicago, and St. Louis Districts. Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items. There were reports, however, of a pickup in sales of moderately priced household goods in the Philadelphia, Dallas, and San Francisco Districts, and gains in apparel sales were reported in the Atlanta and Chicago Districts. Inventories were at desired levels. Looking ahead, retailers in several Districts expected modest sales growth through year-end. In particular, some contacts in New York planned to add more holiday staff than last year.

Most Districts reported that sales of new vehicles held steady or rose during the reporting period. Sales of used vehicles were strong as well. Inventories remained tight, particularly for popular vehicles. Used car prices rose, reflective of solid demand and lean inventories. Respondents' outlooks were for slight growth in sales through year-end.

In other words, consumers are generally acting as they should act: they are frugal, looking for bargains and only buying what they need to buy. However, notice that some slightly higher priced luxury goods are entering into consumer purchases. The apparel numbers are confirmed from the retail sales figures, which show a .5% increase from July to August but a .2% decrease from August to September. Also note the inventories are at "desired levels" indicating that inventory restocking for the retail sector is closer to the end than beginning.

Let's take a look at some of the macro data:

Real (inflation-adjusted) retail sales continue to increase.

Notice that online sales decreased until about halfway through the recession and then started to increase. While this area of sales is only 23% of total sales, it is growing in importance.

Real PCEs continue their upward climb

Services account for the largest part of PCEs, coming in at about 66% of PCEs. This part of PCEs was flat for the first part of the recovery, but has since rebounded.

Non-durable goods purchases are near pre-recession levels.

Durable goods purchases -- the smallest part of PCEs, have stalled for the last few months.

Let's take a look at what the individual districts are saying:

Boston: First District retailers report mixed sales results for September and early October. Year-over-year same-store sales range from decreases in the low single digits to increases in the mid single digits. Contacts note that consumers are increasingly responsive to "getting a good deal;" those with increases attribute the uptick in sales to strong marketing, promotional activity, or stocking "the right mix of products" at discounted prices.

NY: General merchandise retailers report that sales have been mixed since the last report, with same store sales running roughly on par with a year ago and on or close to plan in September. Stores in Manhattan fared somewhat better than in the rest of the region, evidently helped by brisk tourism. One major retail chain notes that sales of seasonal apparel were sluggish due to unseasonably mild weather but that sales in most other categories were fairly good; this contact expects holiday season sales to be up roughly 3 percent from 2009 on a same-store basis. Another contact at a major mall in upstate New York indicates a sharp uptick in sales toward the end of September. Some New York State retailers express concern about the recent reinstatement of the state sales tax on clothing under $110, though it is too early to gauge any effect on sales. Inventories are generally reported to be at favorable levels, while prices remain steady; merchandise acquisition costs have also been steady. A few major retail contacts indicate that they plan to hire more holiday-season staff than in 2009. Auto dealers in upstate New York report that sales of new vehicles held up fairly well in August and September, though the cash-for-clunkers program last summer adversely affected year-ago comparisons. Sales and prices of used cars have reportedly been buoyed somewhat by strong demand and lean inventories of new vehicles. Auto dealers report continued improvement in credit conditions.

Philly: Third District retailers reported modest year-over-year gains for the back-to-school shopping period, and most of those contacted for this report said sales have continued to move up in recent weeks. Some store executives noted that customer traffic and discretionary spending appeared to be increasing somewhat. One said, "Sales of home goods have begun to pick up, as well as sales of things that are not necessarily must-have, but the price has to be right. The consumer is incredibly price-sensitive." Looking ahead, most of the retailers contacted for this report said they expect sales to continue to increase at around the current growth rate through the end-of-year shopping period. Most agreed that stronger growth will not set in until economic conditions, particularly employment, show clear evidence of significant improvement.

Third District auto dealers reported steady sales during September at a rate slightly above the year-ago pace. Inventories were generally described as light, and supplies of popular models were said to be particularly lean. Dealers expect sales to improve slowly during the rest of this year and into next year.

Cleveland: On balance, there was little change in retail sales for the period from mid-August through mid-September, when compared to the previous 30-day period. Consumers remain price sensitive and focused on buying necessities. When given the option, they prefer private-label to premium brands. Retailers expect conservative sales growth at best, going through the holiday season. Several retailers noted modest price increases from their suppliers, which they passed through selectively to consumers. Half of our contacts reported on plans to increase capital budgets in 2011 relative to this year. Hiring will be limited to temporary holiday workers.

Auto dealers characterized new vehicle sales during August as decent, although they were slower than those seen during the peak summer season. Many sellers reported that August sales were down compared to year-ago levels due to the cash-for-clunkers program. Looking toward the year's end, dealers expect modest sales increases at best. New car inventories remain on the light side, especially for popular models. Used vehicle purchases have picked up since our last report, although supplies are tight and prices remain high. The number of financing options is growing across the District, and pricing is competitive. Still, credit standards are tight, and potential buyers often find themselves unqualified for the vehicle they want to purchase. The incremental hiring at auto stores that began in mid-summer has tapered off.

Richmond: Retail activity generally softened since our last report, although a few contacts reported an uptick in sales. Several building supply retailers reported declining sales revenues, while a central North Carolina discount department store manager described sales revenues as "steady." A store manager in West Virginia indicated that back-to-school sales were "good, but not shooting off rockets," and a North Carolina department store wholesaler said business had picked up. However, a North Carolina furniture store manager said that local unemployment was causing him to sell at close to cost. Indeed, big-ticket sales, particularly among automobile dealers, fell sharply in our most recent survey. One exception was a car dealer in West Virginia, who reported that sales rose modestly. Recently polled retailers noted flat or declining customer traffic, although a representative of central Virginia merchants reported a modest increase in credit card use. Price growth strengthened somewhat at retail establishments, according to our District survey, while growth in average wages was little changed.

Atlanta: Most District merchants reported that traffic and sales decreased in September and that they are intentionally keeping inventory levels low. Contacts noted that low-end products and apparel were strong sellers, however, and the outlook among retailers improved only modestly from previous reports. District automobile dealers indicated that vehicle sales were ahead of year-ago levels.

Chicago: The pace of consumer spending was little changed from the previous reporting period. Contacts indicated that consumers were slowly regaining confidence, although they remain very price-conscious. As such, promotions and sales persisted as the primary driver of traffic in stores and showrooms. Retail sales excluding autos in September were nearly on par with the August sales pace. Clothing items continued to sell well, as did electronics and appliances; but furniture sales were again weak. Auto sales held steady even as fewer incentives were offered and access to credit continued to slowly improve.

Minneapolis: Consumer spending grew moderately. A major Minneapolis-based retailer reported that same-store sales in September were up about 1 percent compared with a year earlier. September traffic at a North Dakota mall was up over 10 percent from a year ago, which was a surprise following a slight decrease in August, according to the mall manager. Cooler fall weather seemed to attract shoppers. August sales were up over 10 percent at a Montana mall after a few consecutive months of small gains. August sales were up slightly from a year ago at a Minneapolis-St. Paul area mall. A restaurant chain noted that sales were up 3 percent during August and September from a year earlier. However, a Minnesota-based clothing retailer noted slow uptake of new merchandise offerings; it expects low single-digit increases in same-store sales over the next few months. September car sales in Montana were mixed, according to a representative of an auto dealers association.

KC: District retailers reported stronger than expected sales in September and indicated sales were higher relative to last year. Retailers remained optimistic that sales would continue to increase in the coming quarter but expected softness in selling prices. Restaurants reported much higher sales than a year ago and anticipated future sales gains going forward. The average check amount at restaurants remained flat, although menu prices increased. Automobile sales weakened considerably from the last reporting period but remained slightly above year-ago levels. Auto inventories continued to decline and dealers expressed satisfaction with current inventory levels. The lodging industry noted improved hotel occupancy rates with mountain resort bookings above year-ago rates. Some hoteliers indicated that the occupancy bounce was likely seasonal in nature but reported improved expectations for both occupancy and room rates.

Dallas: Back-to-school spending led to a pickup in sales over the reporting period, however customers remain extremely price conscious. Consumers continue to focus on non-discretionary goods, but contacts noted there was an uptick in spending on medium-priced household goods. Eleventh District sales trended roughly in line with the nation during the reporting period. Contacts expressed caution in their outlooks and said competition remains fierce.

Frisco: Retail sales remained sluggish but improved somewhat on balance. Both traditional department stores and discount retail chains reported modest improvements in sales, although somewhat elevated inventories were noted; moderately priced items such as selected home and garden products reportedly saw the strongest gains. By contrast, retailers of major appliances and furniture reported a further slowdown in activity and expressed pessimism for a reversal over the remainder of the calendar year. Grocery sales were characterized as largely flat, with consumers focused on bargains, and grocers do not anticipate any change in customer buying patterns for the foreseeable future. Sales of new domestic and imported automobiles improved a bit, with dealers citing replacement of broken-down or leased vehicles as key motivating factors for purchases.

Here are some overall comments, in no order of importance:

  • Several districts mentioned that consumers were expanding their purchasing to non-necessities, although the increase seems to be cautious.
  • Cleveland, Richmond and Atlanta are a source of weakness for the economy; retail activity in these areas was weak.
  • "Price conscious" was used by several districts, indicating consumers are still wary about making big purchases.
  • Inventories appear to be in line, indicating retail inventory restocking is nearing an end
  • Dallas, KC and Frisco all seemed to be doing OK;
  • Minneapolis showed some incredibly strong numbers.