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The Week Ahead: Clues About the Consumer

Retail sales and a few key earnings reports will help confirm whether consumers are bouncing back or still down for the count.

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Jason Stipp: I'm Jason Stipp for Morningstar, and we're taking a look at the week ahead with Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome Jason.

Stipp: Next week we're going to get some hints about the consumer with some economic data and a few earnings reports. Let's start with the economic data. We get retail sales this week.

Glaser: On Thursday, we'll get the retail sales number, and if you'll recall in June this number was quite weak. It was down 0.3%--down 0.2% if you exclude autos and gas, which is how our economist, Bob Johnson, likes to look at it because it gets rid of some of that month-to-month volatility. We'll have to see if, in July, those numbers start to look a little bit better, if we have to bounce-back, or if consumers are still going to look somewhat soft.

Stipp: So what if the result doesn't look as great as we're hoping for, or as the market is hoping for? How should we take that report?

Glaser: You shouldn't be too concerned about anything that's happening month-to-month in these numbers. Even when you take out autos and gas; it's still a volatile number. And you shouldn't get too excited or too worried based on any one data point.

I think the right way to look at it, and how Bob Johnson looks at it, is year-over-year data on a three-month average. You're getting rid of those more volatile categories and you're looking on a real basis.

On that perspective, he is looking for anywhere from 2% to 2.5% growth for the second half of 2015. That's close to the recovery averages and gets rid of some of that noise that we had in 2014, when we had these big weather-related effects. We're getting back to a more normal environment.

When you look at that number, it's telling us that, yes, the consumers is doing OK; they are not doing great. We're not getting close to that breakout GDP growth number from retail sales like that. I think we can expect that kind of steady growth to be continuing into this month, no matter what that month-to-month figure really looks like.

Stipp: Most of second-quarter earnings season is now in the rearview mirror. But we will be getting a few retailer earnings reports in the coming week. What are you looking for there?

Glaser: We're going to hear from a lot the major department store chains--including Macy's, Kohl's, and Nordstrom--this week, and I think it's important not to read too much into this in terms of what's happening with the broader consumer. Department stores are a relatively small slice of retail sales and getting smaller. But it does give you some interesting ideas of what's really happening out in the marketplace, at least for their customers.

There are some idiosyncratic things happening with each of these names that we'll be looking out for. For Macy's, they're really trying to kick-start growth. They are doing this by trying to expand internationally, through some e-commerce initiatives, and creating off-price Macy's stores to get people to spend more with them. It might be a little bit early to see a lot of results from that. But we will see how those initiatives are going, and people will be watching those very closely.

For Kohl's it's really a story about whether they are able to find their footing again. They really struggled with the rise of some of these off-price retailers, with e-commerce, and it's really eroded their brands and eroded their moat. We actually recently downgraded them from narrow moat to no moat thinking that their returns on invested capital, which historically had been higher than average, are going to come back to be more in line with their peers, and we could see some evidence of that in this quarter.

Nordstrom has been doing relatively better. Their Nordstrom Rack stores have been performing well; their new stores have been performing well. And they've had positive comp growth in their mainline stores, even if very modest growth. I think the real question for this quarter is, can they continue to outpace their peers? Can they continue to show that they are really a great operator when it comes to department stores? I think that will be a key area people will be focusing on.

Stipp: Also in the coming week, we'll get a peek into the manufacturing sector, with some industrial production data. What do you expect there?

Glaser: Last month's industrial production data showed that maybe the rate of decline in manufacturing had bottomed out, that we're starting to see some signs of stabilization. I think that's really what people are going to be looking for again this month. Given the issues with low oil prices and how that impacts the energy and mining economy, given the way that the high dollar impacts the export economy, no one is expecting a big boom in manufacturing. But I think signs of stabilization would be heartening.

Stipp: Lastly, you expected the Fed watching to continue unabated next week?

Glaser: Yes. Next week and the week after, and the week after that. I think on any of these data reports, the market is going to immediately focus on what does this mean for the Fed? Does this mean that the rate hike is definitely happening in September, or it's not happening in September? The market is going to be hanging on any clue about this whatsoever, and that's going to be going on for quite some time.

Stipp: Jeremy, thanks for helping us get ready for the week ahead.

Glaser: You're welcome Jason.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.