Consumer spending: Why it's a mystery

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If the consumer is so weak, as evidenced in two months of disappointing and declining retail data, why are restaurant sales so strong?

The ultimate discretionary item, eating out is one of the first things to go when times get tough. But it's up 11 percent compared to a year ago, while retail sales excluding restaurants are up just barely more than 2 percent.

To Pierpont Securities economist Stephen Stanley, the restaurant numbers are pretty good evidence that the death of the consumer, and the weakening of the economy in general, are greatly exaggerated. In fact, Stanley sees spending actually doing quite well.

The retail sales report has added to a deepening mystery over the lack of spending with plunging gasoline prices and stronger incomes from a million more Americans finding jobs in the past three months. Theories abound, including that it's being saved and used to pay down debt, with no clear evidence of stronger spending.

Read More US retail sales weak, consumer spending gauge barely rises

But what if—as in a good Sherlock Holmes yarn—the real answer is that there is no murder, no stolen jewelry, no crime at all? In this case, consumers may indeed be spending the money but the Street is looking for it in the wrong place.

Strong restaurant spending could be a clue that there is robust growth in the far bigger but much more poorly counted part of consumption: Services.

"It seems, increasingly, when consumers have extra money these days they are more likely to spend it on services rather than on goods," Stanley said.

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Services make up two-thirds of all consumer spending and, by definition, it isn't counted in the retail sales report. For the last six months of 2014 services ex-utilities were up 2.6 percent, compared to a 1.7 percent rise for core retail. The services number includes a healthy 5.4 percent six-month gain for hotels, evidence that spending on travel—another discretionary category—is on the upswing.

There is no measure of "discretionary services" but a clue can be found in "leisure and hospitality" hiring (which includes restaurants, but also the hotel and amusement industries). It's up 3.3 percent compared to a year ago, a full percentage point better than total employment.

In addition, it also may be that retail spending on goods is not quite as bad as it looks. The reason: Inflation, or in this case, deflation. On Friday morning, the government reported a 2.8 percent decline in imported good prices, including a 0.3 percent fall in the price of imported consumer goods.

But the retail sales report is a nominal report, that is, before adjusting for inflation. What economists care about, and what really counts for growth, is "real" or inflation-adjusted spending.

If prices are falling and yet consumers are buying the same amount of stuff, or even more, the real number is either unchanged or even higher. Economists will get a clearer picture of real spending at the end of the month with the January consumer price index. It won't be until early March when the government reports January services.

Until then, the jury is still out on the consumer spending mystery and it would wrong to convict before all the evidence is in.

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