US consumers out of their shell

New York: Companies from Saks Inc to Best Buy Co are growing more confident that the recent revival of consumer spending is more than just a blip.

New York-based Saks is "moving from defence to offence", selectively rebuilding inventory and increasing investment as consumers "come out of their shell", Stephen I. Sadove, chairman and chief executive officer of the luxury retailer, said in an e-mail.

Same-store sales at Best Buy rose 7.4 per cent in the US during the fourth quarter, the Richfield, Minnesota-based electronics retailer said.

The cause of the turn-around is "a large reservoir of pent-up consumer demand", Michael Niemira, chief economist for the International Council of Shopping Centers in New York, said in an interview. "The rise in spending is sustainable."

The "key factor" determining the pace of household spending will be the strength of the labor market, JPMorgan Chase & Co economists said in a March 12 report to clients.

Companies added 190,000 workers to their payrolls in March, the most in three years, according to the median forecast of 62 economists surveyed by Bloomberg News. The unemployment rate is projected to remain unchanged at 9.7 per cent. The Labour Department releases job statistics for March on Friday.

Optimism

Income growth is also contributing to the optimism. Wages and salaries increased 0.8 per cent from September 2009 to January 2010 after falling 5.1 per cent between August 2008 and July 2009, based on Commerce Department data.

The Standard & Poor's 500 stock index has climbed 72 per cent since last March, which is also boosting confidence. Household net worth rose 11.8 per cent to $54.2 trillion in the fourth quarter of last year from $48.5 trillion in the first quarter of 2009, according to Federal Reserve figures.

The rebound in wealth will boost consumer spending "notably" this year, Dean Maki, chief US economist at Barclays Capital in New York, wrote in a March 12 report to clients. He sees consumption climbing 2.2 per cent this year after falling 0.6 per cent in 2009, its biggest decline since 1974.

Shares of consumer-oriented companies have surged as sales strengthened. The XLY, or Consumer Discretionary Select Sector SPDR Fund, an exchange-traded fund that includes retailers, restaurant chains and hotel companies, has risen 105 per cent since its March 9, 2009, low. The fund has outperformed the S&P 500 since late March last year, as investors placed bullish bets on consumers.

Best Buy climbed $1.48 (Dh5.43), or 3.6 per cent, to $42.66 on March 25, the biggest gain since advancing 4 per cent on March 5, after projecting profit this year of $3.45 to $3.60 a share, exceeding the $3.36 average of analysts' estimates.

Nike Inc's shares jumped $3.78, or 5.3 per cent, on March 18 to $74.66, the highest level in more than 27 years, after the world's largest maker of athletic shoes reported that net income for the quarter ended February 28 more than doubled to $496.4 million, or $1.01 a share.

Future orders for delivery from March through July 2010 rose 4 per cent in North America from a year earlier, the Beaverton, Oregon-based company said on March 17. The gain was the first in more than a year.

Discretionary spending

"Discretionary spending will continue to surprise investors on the upside," said Jack Ablin, chief investment officer for Harris Private Bank in Chicago. He rates consumer discretionary shares an "attractive buy".

The increase in consumption has been driven by people still employed who put off purchases during the deepest recession since the 1930s and are now returning to the shops.

"Everyone has been focused on the 10 per cent unemployment rate," Steven Kernkraut, a portfolio manager at Durban Capital's Berman Capital Management in New York, said in a Bloomberg Television interview on March 4.

‘Spectacular'

"But you have 90 per cent of America that is employed and that 90 per cent that is employed is feeling better about their lot in life." March retail sales will be "spectacular", he forecast.

The Reuters/University of Michigan consumer sentiment index supports Kernkraut's optimism, rising to 73.6 in February and March from 57.3 in March 2009.

"Even though everything is not rosy, consumers are looking ahead," said Rosa-lind Wells, chief economist of the National Retail Federation, a Washington-based trade group. "Maybe they are a leading indicator."

Sales will increase between 3 per cent and 3.5 per cent when retailers report their results on April 8, according to an estimate by the International Council of Shopping Centers.

"Many consumers were simply waiting for improvements in their personal incomes and their balance sheets prior to resuming spending," Tiffany & Co Chairman and Chief Executive Officer Michael Kowalski said on a March 22 conference call with analysts and investors.

The New York-based luxury jewellery retailer reported an 11 per cent gain in sales at US stores open at least a year for the quarter ended January 31, rebounding from a 33 per cent decline in the year-earlier period.