Lou Gerstner Was Right: Consumer Spending Matters, Not Stock Price

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\"RRUS consumers are discriminating as to where they spend, and while demand has come back in what may seem unexpected categories, there is emphasis on experience and on purchases as investment.

Readers of Lou Gerstner’s book, Who Says Elephants Can\’t Dance?: Inside IBM\’s Historic Turnaround, or anybody who has heard the legendary former IBM Corp. CEO speak, will remember some sage advice: pay no attention to the stock price.

Let’s expand on this. Pay no attention to the stock market unless, of course, you’re investing in it. But as an economic barometer, the stock market has proven to be a fickle and even inaccurate judge of global economic health. Making cogent statements thereby is a delicate process, and I would argue that the more reliable barometer is consumer spending. The stock market is at best a confirmation of one’s previous calculations, not a factor in any of them.

What drove Gerstner to make the statement was his epic turnaround of IBM in the last century’s final years. Many friends and associates had congratulated him on the company’s resurgence based on a rebounding equity price. Gerstner warned them the number meant little, and the hardest work was yet to do.

Cut to 2014, when the Dow Jones Industrial Average is reaching for 17,000 — though it currently seems to have a pretty precarious hold on that number. So while on Wall Street there might be growth — interspersed with some profit taking — on Main Street, where many readers of this article do business, things aren’t quite as simple as a needle oscillating between 16,500 and 17,500.

Nor are they simple globally.

For example, at an early July confab in China, attended by US Treasury Secretary Jacob Lew, China Finance Minister Lou Jiwei said that Beijing is not planning any new stimulus measures, adding, according to the Associated Press, that “it is up to the United States to drive the global economy.”
Those might be considered enigmatic words in light of actual shrinkage of the US economy during the first quarter of this year — and by nearly 3% — but we live in a time of enigmas, with a “magic” 17,000 Dow jostling with negative growth in the economy at large.

The key to the enigma, of course — or one of them — is consumer spending. It is a product of behavior that has driven and that will continue to drive the global economy, as Finance Minister Lou knows quite well.

For example, according to MasterCard SpendingPulse, total US retail sales growth, while healthy, evinces a new spirit — new compared with anything discernible before the crisis, that is. SpendingPulse shows strength in restaurants and lodging, which are all about experiences, and this chimes with MasterCard market research that shows that post-crisis US consumers are interested in their own enjoyment of what they spend.

In the same way, jewelry, widely regarded as an investment as much as a luxury purchase, is decidedly preferred over apparel, according to SpendingPulse, just as eCommerce continues to grow in high single digits.

This US picture may be compared with other developed economies; the UK, for example, where sustained positive economic growth, along with persistent declines in inflation and unemployment rates, has helped to push up both consumer confidence and retail sales for a 4% August increase. This increase includes improvement in spending in medium-value discretionary sectors such as department stores and apparel — as contrasted with the US — as well as big-ticket sectors such as furniture. At the same time, luxury and travel in the UK continue to be weak.

As in the past, what seems to confront us here is noise in the data. But it’s music if you know how to listen.

It’s not that the developed world is not recovering from the global collapse of 2008; it’s that it’s recovering in relatively idiosyncratic ways, thanks, in the US at least, to a murky employment picture; a housing market that varies wildly regionally and by price; and, most important, a consumer base that has changed its behaviors in ways neither retailers nor financial services institutions seem to have fully caught up with.

So what does it all add up to? It’s simply that under the pressure of events and of the state, consumers have different responses that could, in fact, have been predicted — if you had paid attention to the data.

Just don’t expect too much from the stock market as a source of information.



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