Consumer discretionary ETFs may find support from strong consumer confidence and a tight labor market that helped fuel Americans’ spending in the third quarter.
According to the Commerce Department, retail sales – a measure of spending at U.S. stores, websites and restaurants – rose 0.5% in July month-over-month, compared to economists’ forecasts for a 0.1% gain, the Wall Street Journal reports.
The growth in retail sales was driven by improved spending at grocery stores, restaurants, department stores and clothing stores.
Looking at consumer sector ETFs, the PowerShares Dynamic Food & Beverage Portfolio (NYSEArca: PBJ), which targets food and beverage companies, dipped 1.5% year-to-date. Meanwhile, the PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEArca: PEJ), which includes restaurant names, rose 4.0%; the SPDR S&P Retail ETF (NYSEArca: XRT), which targets brick-and-mortar retailers, increased 15.5% and the broader Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) advanced 15.4%.
“Restaurants are a highly discretionary category, and continued strength suggests that households are not too worried about higher gas prices and that tax cuts are providing a cushion,” Morgan Stanley economists said in a note.
Excluding both motor vehicle and gasoline, sales were up 0.6% in July. Sales at food and beverage stores gained 0.6% last month, the strongest growth rate since December.
Consumer spending is a widely observed indicator for the U.S. economy since it represents about two-thirds of economic output. Consumer spending was weak in the first quarter of this year but quickly picked up in the second, a trend which the recent report suggests has continued early in the third quarter.
“The American consumer is healthy,” Michael Kors Holdings Chief Executive John Idol said during an Aug. 8 earnings call.
The improved spending is attributed to the low unemployment rate, which was 3.9% in July, along with rising wages. The strength in the jobs market and a broader economic growth have contributed to the higher consumer confidence. Furthermore, tax cuts also appear to be supporting the robust consumer demand as many households have experienced lower withholding from paychecks due to the tax overhaul.
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