Best Buy Earnings Point To A Weaker U.S. Consumer

Best Buy, the large electronics retailer, reported earnings for the quarter ended February, surprising Wall Street on the downside. (At noon the shares were down more than two percent in a rising market.) As we've discussed here before, consumer electronics have been a consistent source of growth in U.S. GDP, so the numbers could be a sign of weakening consumer spending, at least on discretionary stuff, as more of our collective budget has to be devoted to gasoline and food.

The earnings report represents just one company, so there can be all sorts of idiosyncratic explanations for the drop, but the report comes on the same day we hear about unexpected declining orders for durable goods (although that is mostly business oriented).

When 3Q 2010 GDP was reported back in October, I looked at the composition of the whole thing, in particular consumer spending (which makes up about two-thirds of U.S. economic activity). I was surprised by the strong contribution that came from the "Recreational Goods and Vehicles" category, which from what I can tell, is made up these days mostly of consumer electronics.

At the time, I figured that while shiny new phones, tablets and televisions aren't the staples of economic growth, as cars and homes have been in the past, at least people were spending on something.

The contribution to the economy by such stuff is surprisingly large: the graph below plots the proportion of GDP growth (not the total GDP) of recreational things in orange, and everything else in blue (click to enlarge the graph):

Recreational goods were 10 percent of GDP growth, on average, in each quarter of 2010 -- an important contributor. During 2010, their growth accounted for as much as car sales, and as much as food, beverages and clothing combined.

So I paid special attention to the earnings report of Best Buy this morning, covering the quarter and year ended February 2011 -- two months more than the latest GDP report. (We get a look at 1Q 2011 GDP tomorrow).

Best Buy's total sales were down two percent for the quarter, and on a same-store basis down 4.6 percent. Sales in the U.S. were down 5.5 percent; entertainment sales, including hardware, software and TVs, were off 14 percent, and consumer electronics down seven percent.

For the 2012 fiscal year, Best Buy is projecting a one to four percent revenue gain, but that will include a 53rd week, which grants an automatic increase of two percent.

OK, it's not a total collapse in consumer spending, and it's just one company's results, but we could be seeing the first bite of inflation on the consumer, through higher food and gasoline prices.