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Hutchens Investment Management Commentary - Consumers in Hibernation
Consumers are impacted directly by natural gas prices that affect 80% of heated homes. Morgan Stanley estimates the increases in natural gas prices have cut $34.7 billion in household spending and this number may be understated. The Henry Hub spot price climbed to $8.15 per million btu yesterday, compared to $3.25 during the same week a year ago. Although the $34.7 billion is only a small share of total disposable income, it is non-discretionary and concentrated in the November-January period. We anticpate the weather disruption to materially affect additional data releases for January and February. Last week’s disappointing retail sales (-0.4%) and declines in industrial production (-0.3%) for Janaury are foretelling lower GDP for 1Q2014. If history is any indication, most of what is lost in 1Q2014 will be recouped the following quarter. The consumer remains in good financial shape after having been tested by Washington’s policies and although not spending to the levels anticipated thus far in 2014, they are still spending.
Aside from the weather disruptions and its effect on consumer spending there is a seachange occuring in the broad retail sector. Retail sales account for about 40% of total consumer spending. Much has been made of the 0.4% monthly decline in the seasonally adjusted retail sales in Janauray 2014 from December 2013. (Year-over-year January sales rose 3.0%.) Declines were concentrated in the furniture, electronics and department sub-categories which in total account for about 5.6% of total retail sales and are the most sensitive to changes in consumer spending patterns. More importantly, a longer-term perspective is the growth in non- store retail (Internet), which is mostly electronic shopping, and by definition includes online purchases not in the sub-category.
This most recent Holiday season through January has been characterized by slower soft goods sales, most notably in clothing and apparel. Although conventional traffic has been down substantially, ancilliary data lead us to believe much of the lost sales at the brick-and-mortar malls and department stores are conducted online. This was confirmed when individual store sales were better-than-
We believe consumer non-durable retail sales are in the early stages of a paradigm shift away from traditional brick-and-mortar to fully functioning online warehouses. Small, but not inconsequential, developments are energizing this shift. Among these are the ability of one-stop shopping across a broad array of products and vendors (Amazon), comparative price visibiltiy, and free shipping, all resulting in lower costs and productivity gains for the seller and the purchaser. Unforseen events, such as the security breach with Target’s in-store check-outs, shifted purchases to the Internet. Younger shoppers are using smart phones to do normal everyday tasks, including clothing and apparel purchases. It will not be long before standard sizes among manufacturers helps alleviate the return problems. Additionally, we would expect a credit card business to somehow alter the landscape by easing payment methods or offer volume discounts, rather than have their profits compromised by vendor alternatives.
Our investment strategy remains long-term optimistic on corporate equities. The recent sell-off was more technical than fundamental and more short term than long term. We believe the economy in 2014 will trump the negatives as the year unfolds.