For most of my life, the economy has behaved like an individual. Sometimes, the little guy is happy, and sometimes, he's sad. But recently he's gotten truly confused. No longer is he all happy or all sad -- he's kind of happy about one thing, while being devastated about another. Recent economic releases continue to confound anyone looking for signs of a recovery, or another bust. Home prices are up, but consumer confidence is down. With so many mixed signals, what's an investor to do?
The state of things
Consumer confidence fell in August to its lowest point since last November. The drop stems from an odd assortment of beliefs among consumers. Based on the most recent poll, it seems that Americans are more worried about future employment and business, but somehow less worried about their own financial outlook. That poses a puzzle for retailers and business as we move toward the end of the year -- not because the information is confusing, but because, on some level, it makes sense.
Let's think about what those numbers could be saying. First of all, they're clearly saying that consumers are worried about the future. With the upcoming election, and those bouncing house-price figures, it makes sense that we would be unsure of what lies ahead. But people are also reporting that they're more confident in their own personal finances. To me that means one thing -- savings. The personal savings rate bumped up in June this year, the most recent figure. That number puts U.S. consumers at odds with retailers and could foretell another rough holiday season.
Who's at risk
The accepted wisdom holds that when people cut back, they cut back on larger, discretionary items. That was the logic that Tiffany (NYSE: TIF) rolled out in its recent earnings report, arguing that poor economic conditions have affected sales this year. But that reasoning doesn't account for companies like Michael Kors (NYSE: KORS), which have managed to grow sales, even as the economy flounders. Last quarter, Kors increased revenue by 71% off a same-store sales increase of 37%. That seems to indicate that consumers are buying things they don't need -- unless they happen to need $175 foxtail hangtags, whatever those are.
In fact, retail spending continues to rise almost across the board. Retail spending bounded forward in July, with a number of companies reporting successful beginnings to the back-to-school season. Target (NYSE: TGT) has raised its yearly guidance, anticipating a strong end to the year, while Macy's (NYSE: M) saw same-store sales increase 4% in July. Apart from Tiffany, all of these companies are doing well. The increase in savings doesn't seem to be affecting sales, yet consumers report being less confident overall.
A new era of error
One of the easiest explanations for the conflict is that the government report is simply flawed -- what a shock. An August study from the University of Michigan might give us a better view of sentiment. It claims that consumers are on the rebound, feeling better than they have in months, which aligns with sales data. If that's the case, then investors should be jumping up and down for joy. A strong end of 2012 could signal both a great return on stocks and more sustained growth in employment, if demand picks up enough.
Of course, in any situation like this, it's best to focus on what's actually happening, rather than try to read the entrails for signs of the future. That's why I like to stick to the monthly reports that many retailers release, updating their sales positions for the quarter. Those reports have largely been favorable, and so I'm riding a bit high on the outlook for the end of the year. That's not to try to predict a windfall second half -- it's just to make sure that if something good does happen, I'm in a place to benefit from it.
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