Changewave Research: Consumer Spending

ChangeWave Research: Consumer Spending

SeptemberConsumer SpendingReport

U.S. Spending StabilizesforSeptember – But Outlook Uncertain

Paul Carton and Jean Crumrine

Overview:In recent months, ChangeWave surveys have shown the largest slowdown occurring in U.S. consumer spending since the end of the recession. But our latest monthly survey of 2,642 consumers shows that spending – while still weak – has finally begun to stabilize. ChangeWave Research is a division of The 451 Group.

Importantly, the September 6-16 survey points to small but discernible signs of improvement in overall purchasing going forward, including an uptick in spending on consumer durable goods. And while consumer expectations and confidence remain exceptionally low, they still aren’t quite as bad as they were a month ago.

Also, for the second straight survey Apple is hitting new highs in the home entertainment market – where Amazon is also outperforming its competitors. Nonetheless, there are few signs of momentum among the othermajor retailers this month.

Whether the stabilization we’re seeing in September is a sign of reversal, or just a temporary respite before spending resumes a new downward slide, is uncertain at this point. We’ll know more after our October survey, where we’llbe taking an early look at spending trends for the Holiday season.

Spending Outlook Stabilizes for September

A total of 23% of U.S. respondents say they'll spend more over the next 90 days than they did a year ago – unchanged from our previous survey in August. While 38% say they'll spend less – that’s 2-pts improved from a month ago.

Putting These Findings in Context. After tracking a consumer spending slowdown over the past few months,our September results point to a stabilizing spending outlook. And while the findings show only a tiny improvement since last month, the most important thing is they’ve stopped getting worse – which is a good sign.

Individual Spending Categories

In terms of individual categories, we’re seeing a slight uptick in spending on consumer durable goods, even as most other categories – while more stable than last month – remain sluggish.

The following chart shows the improvement in Consumer Durable Goods spending, with 11% saying they’ll spend more on consumer durable goods over the next 90 days and 25% less – up a net 2-pts since August.

Spending on Household Repairs/Improvements is registering a slight 1-pt improvement since the previous survey,whileAutomobiles are unchanged.

For the fifth consecutive survey, Restaurant spending has declined – with just 9% saying they’ll spend more on eating out compared to 33% less – down 1-pt from the most recent low in August.

Despite super-hot tablet and smart phone sales, overallConsumer Electronics spending has also declined 1-pt since last month and is down a full 5-pts compared to a year ago.

Consumer Expectations and Confidence

Respondents were asked their impressions of the economy, and while things don’t appear quite as awful as they did in August, they’re still clearly bad.

Consumer Expectations. Three-in-five (61%) respondents believe the overall direction of the economy is going to worsen over the next 90 days and only 8% think the economy is going to improve – but that’s a net 1-pt improvement since August.

Stock Market Confidence. An exceptionally low7% saythey are More Confident in the U.S. stock market than they were 90 days ago while 64% say they’re Less Confident, but that’s a net 6-pt improvement over the abysmal reading last month.

Underlying Reasons

The survey shows a continuation of the trends we’ve been seeing since June, with more consumers reporting they’re Saving More Money (30%; up 1-pt) and Reducing Debt(29%; up 3-pts) – similar to what we saw during the recession.

Last month we reported that the sluggish spending environment appeared more due topsychological factors than purely economic ones. Specifically, there was a direct tie between slower consumer spending and the debt reduction controversy and S&P credit rating downgrade.

This month we again asked respondents whether the recent U.S. credit rating downgrade and the debt reduction controversy were having any impact on their spending behavior.

Standard & Poor's recently lowered the U.S. credit rating from AAA to AA+, stating among other things that the recent debt-reduction bill didn't go far enough to improve the U.S. government's fiscal situation.

Thinking about your own discretionary spending over the next 90 days, is the recent S&P downgrade and continuing debt-reduction controversy causing you to decrease your discretionary spending, increase your discretionary spending, or is it having no impact on your discretionary spending over the next 90 days?

Current Survey
Sep ‘11
More Likely to Decrease Spending for Next 90 Days Because of the S&P Downgrade and Continuing Debt-Reduction Controversy / 24%
More Likely to Increase Spending for Next 90 Days Because of the S&P Downgrade and Continuing Debt-Reduction Controversy / 1%
No Impact on My Spending for Next 90 Days / 72%
Don’t Know / 4%

One-in-fourconsumers (24%) say they’re more likely to Decrease spending for the next 90 days because of the S&P downgrade and continuing debt-reduction controversy. But while the issue is clearly still having an impact on consumers, it’s not as great as one month earlier when 47% said they were more likely to Decrease spending because of the S&P downgrade and 35% because of the debt reduction controversy.

Major Retailer Trends

The spending picture among most major retailers remains unchanged – with a few notable exceptions:

After taking a hit last month, Mall retailer Macy’s (M) is up 3-pts for September, and Nordstrom (JWN) is up 2-pts.

While Costco (COST) is down 1-pt, it continues to lead among retailers in terms of spending growth going forward.

Target (TGT) is also down 1-pt,but Walmart (WMT) is unchanged for the second survey in a row.

Home Entertainment Retailers

After experiencing a big surge in the previous survey, Amazon (AMZN; 38%) remains the leader in the home entertainment/computer networking market – unchangedfrom its August peak.

In contrast, as our ChangeWave surveys have shown throughout 2011 we’re seeing continued tough times ahead for Best Buy (BBY) – with just 31% saying they’ll shop there for home entertainment/computer networking products going forward. That’s tiedfor their lowest level ever in a ChangeWave survey.

In a positive finding forApple (AAPL), for the second month in a row it’s hitting a new high in the home entertainment market, with one-in-five (20%; up 1-pt) now saying they’ll shop at Apple stores for home entertainment and computer networking products inthe next 90 days.

We also took a closer look at the resignation of Steve Jobs and found it is havingvery little impact on consumer demand for Apple products – with just 4% saying his resignation makes them Less Likely to buy Apple products in the future, while 89% say it is having No Effect.

When asked a similar question during Jobs’ first leave of absence in June 2008, nearly one-in-five respondents (18%) said they would be Less Likelyto buy Apple products if Jobs stepped down. Since then we’ve asked this on several other occasions, and consistently found the impact of Jobs stepping down to be lessening in the minds of consumers.

The results suggest that Jobs’ previous absences had an ‘inoculating’ effect over time that has allayed consumer concerns on whether the company could operate at the same level without Jobs at the helm.

Bottom Line:Our September survey shows asmall improvement in consumer purchasing behavior going forward and a stabilizing insentiment and expectations. But overall spending remains weak, and it’s uncertain whether September is a true sign of reversal or a respite before spending resumes its downward slide. We’ll know more after our October survey.

Summary of Key Findings

The ChangeWave Research Networkis a group of 25,000 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Table of Contents

Summary of Key Findings...... 7

The Findings...... 9

(A) Overall U.S. Consumer Spending...... 9

(B) Individual Spending Categories...... 11

(D) Underlying Reasons for Downturn...... 17

(E) Retailers...... 20

(F) Home Entertainment Shopping...... 23

(G) Impact of the Economy on Investors...... 27

ChangeWave Research Methodology...... 28

About ChangeWave Research...... 28

The Findings

Overview: In recent months, ChangeWave surveys have consistently shownthe biggest slowdown occurring in U.S. consumer spending since the end of the recession. But our latest monthly survey of 2,637 consumers shows that spending – while still weak – has finally begun to stabilize. ChangeWave Research is a division of The 451 Group.

The September 6-16 survey points to small but discernible signs of improvement in overall purchasing going forward, including an uptick in spending on consumer durable goods. And while consumer expectations and confidence remain exceptionally low, they still aren’t quite as bad as they were a month ago.

Whether the stabilization we’re seeing in September is a sign of reversal or just a temporary respite before spending resumes a further downward slide is uncertain at this point. We’ll know more after our October survey, where we’ll take an early look at spending trends for the Holiday season.

(A) Overall U.S. Consumer Spending

Would you say your overall spending over the next 90 days will be more than last year, less than last year, or the same as last year?

Current Survey Sep ‘11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun ‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
More Spending Than Last Year / 23% / 23% / 29% / 32% / 35% / 26% / 32%
Less Spending Than Last Year / 38% / 40% / 34% / 31% / 28% / 35% / 32%
Spending Will Remain
the Same as Last Year / 37% / 35% / 36% / 35% / 35% / 38% / 36%
Don't Know / 2% / 2% / 2% / 1% / 2% / 1% / 1%

Putting These Findings in Context. After tracking a consumer spending slowdown for the past few months,our September results point to a stabilizing spending outlook. And while the findings show only a tiny improvement over last month, the most important thing is they’ve stopped getting worse – which is a good sign.

Note that we’re seeing a slight improvementforlow-to-upper middle income households (Up to $150,000), buthigh income households (Greater Than $150,000, which account for a higher percentage of discretionary spending, still show a decline going forward.

Current Survey (Sep 2011) – Breakdown by Income Levels

Total / Less
Than
$100,000 / $100,001-$150,000 / Greater Than $150,000
More Spending Than Last Year / 23% / 21% / 26% / 23%
Less Spending Than Last Year / 38% / 41% / 36% / 36%
Spending Will Remain the Same as Last Year / 37% / 36% / 36% / 40%

(B) Individual Spending Categories

Which of the following consumer items will you be spending more money on over the next 90 days compared to last year? (Check All That Apply)

Current Survey Sep ’11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun ‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
Household Repairs/ Improvements / 31% / 31% / 31% / 36% / 35% / 32% / 32%
Travel/Vacation / 20% / 24% / 29% / 32% / 30% / 23% / 27%
Consumer Electronics / 14% / 15% / 13% / 15% / 17% / 17% / 17%
Healthcare Services / 13% / 12% / 13% / 12% / 12% / 14% / 13%
Durable Goods for the Home / 11% / 10% / 11% / 13% / 14% / 12% / 12%
Restaurants/Everyday Entertainment / 9% / 10% / 12% / 13% / 14% / 11% / 13%
Children's Services
(e.g. camp, education, lessons, other activities) / 8% / 7% / 8% / 8% / 9% / 9% / 9%
Automobile Purchase / 6% / 6% / 7% / 6% / 6% / 6% / 7%
Other Services (e.g. adult education, fitness activities / 4% / 4% / 3% / 4% / 3% / 5% / 4%

And which of the following consumer items will you be spending less money on over the next 90 days than last year? (Check All That Apply)

Current Survey
Sep ‘11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun ‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
Consumer Electronics / 34% / 34% / 32% / 31% / 31% / 32% / 31%
Restaurants/Everyday
Entertainment / 33% / 33% / 31% / 31% / 27% / 30% / 28%
Travel/Vacation / 30% / 31% / 28% / 27% / 24% / 30% / 28%
Durable Goods for the
Home / 25% / 26% / 24% / 24% / 23% / 24% / 25%
Automobile Purchase / 22% / 22% / 20% / 21% / 22% / 22% / 21%
Household Repairs/
Improvements / 15% / 16% / 16% / 15% / 15% / 16% / 16%
Other Services (e.g. adult education, fitness
activities) / 9% / 9% / 9% / 9% / 9% / 9% / 10%
Children's Services
(e.g. camp, education,
lessons, other activities) / 8% / 8% / 9% / 9% / 8% / 9% / 8%
Healthcare Services / 7% / 7% / 7% / 7% / 8% / 7% / 8%

Change in Net Difference Score - Current Survey (Sep 2011) vs. Previous Survey (Aug 2011)

Current Survey
Net Difference Score
(Sep ’11) / Previous Survey
Net Difference Score
(Aug ’11) / Change in Net Difference Score
Durable Goods for the Home / -14 / -16 / +2
Household Repairs/Improvements / +16 / +15 / +1
Healthcare Services / +6 / +5 / +1
Children’s Services (e.g. camp, education, lessons, other activities) / 0 / -1 / +1
Automobile Purchase / -16 / -16 / 0
Other Services (e.g. adult education, health and fitness activities) / -5 / -5 / 0
Consumer Electronics / -20 / -19 / -1
Restaurants/Everyday Entertainment / -24 / -23 / -1
Travel/Vacation / -10 / -7 / -3

Individual Spending Categories. In terms of individual categories, we’re seeing an uptick in spending on consumer durable goods. Most other categories have stabilized or show a tiny improvementcompared to last month – but all-in-all they’re still sluggish.

For the first time in six months, we’re seeing improvement in Consumer Durable Goods spending. A total of 11% say they’ll spend more on consumer durable goods over the next 90 days and 25% less – up a net 2-pts from August.

Spending on Household Repairs/Improvements is registering a slight 1-pt improvement since the previous survey and Automobiles are unchanged.

For the fifth consecutive survey, Restaurant spending has declined –with just 9% saying they’ll spend more on eating out compared to 33% less – down 1-pt from the most recent low in August.

Despite super-hot tablet and smart phone sales, overallConsumer Electronics spending has also declined 1-pt since last month and is down a full 6-pts compared to a year ago.

Travel/ Vacation spending is registering a pullback for the sixth survey in a row, down 3-pts since August.

Let's focus on two of the biggest U.S. home improvement retailers, Home Depot and Lowe's. Which of these two stores - if any - do you and your family most prefer to shop at for your household repair/improvement items?

Current Survey Sep ‘11 / Previous
Survey
Feb ‘11 / Previous
Survey
Jan ‘11 / Previous
Survey
Jun ‘10
Prefer Home Depot / 34% / 34% / 37% / 36%
Prefer Lowe's / 29% / 30% / 27% / 24%
No Preference / 28% / 28% / 25% / 28%
Do Not Shop at Either Store / 6% / 5% / 6% / 6%
Don't Know / 3% / 3% / 4% / 5%

(C)Consumer Expectations and Confidence

Respondents were asked their impressions of the economy, and while things don’t appear quite as awful as they did in August, they’re still pretty bad.

In your opinion, which of the following statements best describes the overall direction of the economy over the next 90 days?

Current Survey Sep ‘11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
The economy is going to improve over the next 90 days / 8% / 9% / 16% / 11% / 25% / 17% / 16%
The economy is going to worsen over the next 90 days / 61% / 63% / 46% / 51% / 38% / 47% / 40%
The economy is going to remain the same over the next 90 days / 30% / 28% / 37% / 37% / 36% / 36% / 44%

Consumer Expectations. Three-in-five (61%) respondents believe the overall direction of the economy is going to worsen over the next 90 days and only 8% think the economy is going to improve – but that’s a net 1-pt improvement since August.

Are you now more or less confident in the U.S. stock market compared to 90 days ago?

Current Survey Sep ‘11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
More Confident Than 90 Days Ago / 7% / 7% / 13% / 7% / 18% / 11% / 16%
Less Confident Than 90 Days Ago / 64% / 70% / 50% / 60% / 42% / 50% / 44%
No Change / 25% / 20% / 35% / 29% / 36% / 36% / 37%
Don't Know / 4% / 3% / 3% / 2% / 1% / 4% / 3%

Stock Market Confidence. An astonishingly low 7% saythey are More Confident in the U.S. stock market than they were 90 days ago while 64% say they’re Less Confident, but that’s a net 6-pt improvement over the abysmal reading last month.

Other consumer indicator findings from the survey:

Looking back at where you thought the economy was headed 3 months ago, would you say the current state of the economy is better than you thought it would be, about the same, or worse than you thought it would be?

Current Survey Sep ‘11 / Previous
Survey
Aug ‘11 / Previous
Survey
Jul ‘11 / Previous
Survey
Jun ‘11 / Previous
Survey
May ‘11 / Previous
Survey
Sep ‘10 / Previous
Survey
Aug ‘10
Better Than I thought it Would be 3 Months Ago / 4% / 3% / 10% / 7% / 21% / 9% / 12%
About the Same / 31% / 29% / 47% / 46% / 56% / 48% / 55%
Worse Than I thought it Would be 3 Months Ago / 64% / 68% / 43% / 46% / 22% / 43% / 32%

(D) Underlying Reasons

The survey shows a continuation of the trends we’ve been seeing since June, with more consumers reporting they’re Saving More Money (30%; up 1-pt) and Reducing Debt(29%; up 3-pts) – similar to what we saw during the recession.

At the same time, the percentage who say they’re spending less because of Reduced Income (36%) is unchangedfrom previously – its lowest level in nearly three years.