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How to gauge consumer spending

It's difficult to know with certainty how consumers feel but there are plenty of factual indicators which provide better guides to the state of the high street than some management commentary
July 14, 2016

It's quickly becoming the excuse par-excellence, especially for consumer-facing companies: Sentiment has been weak in the run up to and since the referendum, which is why performance has been dampened. But is this just a way to cover up operational performance that needs improving?

In the past few days the sharpest drop for 21 years was witnessed in the GfK consumer confidence barometer, which measured sentiment between 30 June and 5 July. Not only that, but the latest British Retail Consortium-KPMG survey showed a 0.5 per cent fall in like-for-like sales. Total turnover rose 1.2 per cent on a 12-month average basis though - albeit the lowest 12-month average since May 2009.

But given the British Retail Consortium cautioned against calling this a trend, what exactly should investors be looking at as indicators which show that spending has actually fallen? And is a drop in sentiment the same as an actual slowdown in spending?

Simon Ward, chief economist at Henderson Global Investors, acknowledged while the GfK survey suggested confidence had dropped sharply, it was "only back to its long-run average, ie it is not at a recession level".

He added many economists monitored high-frequency indicators to try to gauge the actual impact of the Brexit vote on spending. These included measures sucg as weekly sales at John Lewis, which did lull after the vote but have since recovered to their pre-referendum level. Mr Ward also watched high street footfall data, compiled by Springboard, which showed footfall in the week beginning 4 July was up 2.4 per cent on the previous week. It was down 0.9 per cent year-on-year though partly due to sporting events keeping people glued to their TVs.

"As a 'monetarist', I am also monitoring the stock of notes in circulation, which the Bank of England releases weekly with a one-day lag," Mr Ward said. "This correlates reasonably well with retail sales so a sharp drop would be worrying. The latest numbers were still strong."

Beyond this, Simon McGarry, senior equity analyst at Canaccord Genuity Wealth Management, said a growing trend was that of consumers spending money on experiences meaning even if sales of goods dropped, it did not necessarily mean people were spending less.

He also said the retail sales figures from the Office for National Statistics were worth watching, and had recently showed "meaningful positive numbers", while car registrations were also a good indicator of consumer spending. Data from SMMT showed these had flattened year-on-year for June but the more than 1.4m new cars registered in the first six months of 2016 was "the best half-year performance ever recorded".

Mr McGarry also pointed to mortgage approvals, which at 67,000 per month, according to the most recent data, were well above the 45,000-50,000 a month seen in 2011.

Our resident economist Chris Dillow also said spending is habit-forming and so relatively sticky. He said sudden changes in income "don't lead to proportionate changes in spending but to changes in saving instead". A rise in income is likely to lead to more spending, as habits change, while a drop in income will lead to less money saved but spending largely protected. Habits are likely to trump sentiment, meaning the latter is potentially a weak indicator.

There is of course the potential consumers could trade down - maintaining their consumption habits but doing so more frugally - particularly if you view consumption as being already weak given the lacklustre growth of consumer spending compared to the rise in house prices, discussed here by Mr Dillow.

Broker Peel Hunt expects retailers such as Card Factory (CARD), home furnishings retailer Dunelm (DNLM), discounter B&M European Value Retail (BME) and online clothing businesses Asos (ASC) and Boohoo.com (BOO) to perform strongly in a consumer downturn, as they did during the financial crisis.