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Consumer spending comprises 71% of GDP, so even a small decline in spending can wipe out growth in other parts of the economy, sending overall GDP growth into negative territory.

Gauging consumer spending in real-time is tricky business.  We turned to Craig Johnson, CEO of Customer Growth Partners, a consulting firm based in New Canaan, Conn.  Johnson’s focus is on macro trends in consumer behavior for corporate clients, while identifying and overcoming the statistical and institutional biases in reported data.

“Clearly the economy has softened,” says Johnson, adding that “two parts of the economy – financial services and housing– have receded.”  The single biggest factor in the 0.6% decline in fourth quarter GDP was a dramatic cutback in inventories, reducing GDP growth by 1.5%.  The decline in residential construction contributed another 1.25%.  Without these two burdens, GDP would have grown 3.3%, which Johnson characterizes as “okay, but clearly not a disaster.”

“January and February got us a little further into the ditch,” notes Johnson.  He believes the Q1 GDP number will be low, an increase of somewhere between 0.6% and 2.0%, but does not expect a negative number. 

”The consumer is still rocking along, but at a more cautionary pace” Johnson says.

And he explains why.

Don’t Believe What You Read

“A lot of conventional wisdom is wrong when it comes to the reported data for consumer spending,” he says.

Johnson is highly critical of public and private databases that have failed to keep pace with the changing landscape of retail spending.  The primary source of consumer data is the Department of Commerce, which collects data directly from retailers, based on their industry classification (SIC code).  Data collection for the largest retailers (Sears, Lowe’s, Home Depot, Wal-Mart, etc.) is fairly comprehensive, and their survey randomly selects mid-tier and smaller firms.

The biggest problems are definitions of categories and data collection periods, which Johnson says are “stuck in the last century.”  Reporting of e-commerce data lags by a month, although technology should enable faster reporting of this data than that of in-store sales.  The result is reported holiday sales in December leave out the 7% of revenue from the on-line channel, which is the fastest growing segment, up from 6% of sales in 2006 and 5.5% in 2005. 

January sales were purportedly the worst in history, but Johnson says this data can be highly misleading.   A good portion of technology sales, such as iPods, iPhones, and iTunes downloads is not counted in the Commerce Department’s retail statistics.   Apple Retail is a $5 billion company with revenues growing at 50%.  But this revenue “drops out of consumer spending altogether,” and shows up in the GDP in durable goods, Johnson says.  He is confident this is not an isolated example.

A related problem affects Amazon, the nation’s 15th biggest retailer, whose revenue is classified by analysts in technology indexes instead of retail indexes.

Johnson also notes that eBay’s revenue, representing the consumer-to-consumer channel, is “all but ignored” in industry statistics.  “There is a whole new channel of consumer-to-consumer commerce that is not being tracked,” says Johnson.

Barter and cash sales (such as those paid to a housecleaning or lawn care service) do not show up but, unlike e-commerce and eBay revenue, this is not a new problem.

The National Retail Federation picks up data from the Commerce Department and propagates the errors.

Data gleaned from consumer sentiment surveys holds little value for Johnson.  “Consumers consistently underestimate their actual spending,” says Johnson, who has 20 years of data to back up this claim.  He notes that the only reliable metric is an inverse relationship to the price of gasoline – as fuel prices go up, consumer sentiment goes down, and vice versa.  “I am a big believer in what is actually happening in stores, not what consumers say they are going to do,” says Johnson.

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