US Consumer Spending Goes Haywire – The “New Abnormal”

US Consumer Spending Goes Haywire – The “New Abnormal”

American consumer spending is a funny thing.  For years, throughout much of the 00’s, we watched in amazements as the US consumer went on the greatest spending binge in the history of Planet Earth.

First, we spent all the money we had.  Then, we spent all the money we didn’t have.  We borrowed against our credit cards, our homes, our future earnings – you name it, we’d borrow against it!

In 2007, when the credit crisis first hit, a permanent shift seems to have occurred in the psyche of the American consumer.  For the first time since World War II, the trend of more credit and more spending reversed.  The American consumer actually began to delever – a process that’s (painfully) continuing today.

The term “New Normal” was coined by economists and market observers to describe the newfound frugality that’s going to govern the lives of US consumers for years to come.

The other day, I learned that lipstick sales were through the roof – reason being is that women can no longer afford the big ticket beauty items, so they are splurging on the lower end accessories, such as lipstick.

Makes sense to me – the expensive items suffer, while cheaper items thrive, in this type of (dare I say it) – deflationary environment.

But according to some recent economic data, the change in spending patters may be far less rational than this.  The recovering spending addict that is the US consumer still reaches for his or her “fix” of the good life.

Bloomberg reports (hat tip JL for the story):

On a recent afternoon, Lucy Johnston, 37, an accountant from Tulsa, Oklahoma, could be found at the Fashion Show mall on the Strip in Las Vegas. She’s cutting back on shopping and eating out because of the recession.

“It’s really tough right now,” Johnston says. “I don’t do many full-on spa days anymore.”

Yet there she was, shopping and vacationing in Vegas with her husband.

“We’ve pulled out all the stops. We’re staying at the Bellagio,” she says.

Most shoppers are being described as “schizophrenic consumers”:

They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo. Companies such as Cupertino, California-based Apple, whose net income jumped 94 percent in its last quarter, and Starbucks Corp., which saw a 61 percent increase in operating income over the same time frame, are thriving.

Mercedes-Benz is having a record sales year; deliveries of new vehicles in the U.S. rose 25 percent in the first six months of 2010. Lexus and BMW were also up. Though luxury-goods manufacturers such as Hermes International SCA and Burberry Group Plc are looking primarily to Asia for growth, their recent earnings reports suggest stabilization and even modest improvement in the U.S.

You can read the full piece about the “New Abnormal” on Bloomberg.com

To say that Starbucks and Apple are recession plays is a bit of a stretch though – according to Mr. Market himself.  Pulling up the charts, I’d say it’s more fair to call each stock a “reflation play” more than anything.

There weren’t too many folks lining up for venti lattes when the broader equity markets were tanking in 2008:

Starbucks Price Chart August 2010Source: StockCharts.com

Meanwhile Apple has certainly benefited quite a bit from the postponement of financial armageddon:

Apple Stock Price August 2010

Source: StockCharts.com

If the equity markets turn down from here (and we think stock prices peaked in April), then I’m not entirely sold on the New Abnormal story as justification that these two stocks would weather the storm.  Last time they got hammered – so I don’t see why it’d be different next time around.

Though if you’re looking for a short play, I”d probably look for some sicker stocks than these two.  Stocks that didn’t rally much or at all over the last 18 months would be a great place to look.  While I’m not as wildly bullish on SBUX and AAPL as the mainstream press, I also wouldn’t want to be stuck holding a short position in the event that our broader outlook proves to be incorrect!

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