The Startling Truth About Consumer Spending

| August 13, 2010 | 0 Comments

The results are in.

It looks like unemployment insurance benefits are the key to our economic recovery.  It’s an ugly development.  But it’s creating a unique opportunity for you to profit.

Let me explain…

Right now the unemployment rate in the U.S. stands at 9.5%.  That’s 14.6 million Americans who are unemployed.  (I’m not even going to get into how many more millions are underemployed.)

Here’s what’s most disturbing.  Millions of people are out of work for far longer than in any previous downturn.  The average time of unemployment has exploded.  It’s unlike anything we’ve ever seen.

Can you believe the average length of time a worker is unemployed has reached more than 35 weeks!

Simply stated, it’s a disaster.

Fortunately, unemployment benefits have helped replace some lost wages.  They’ve helped families weather the economic storm.  It’s even helped stabilize the economy.

How important are these benefits to the overall economy?

I think their impact is huge.  And the data backs me up.

Consider this…

9.7 million people are currently collecting unemployment.  Almost 4.5 million people are in their initial 26 weeks of unemployment.  And more than 5.2 million people are on extended benefits.  These benefits kick in after their initial 26 weeks.

The amount of money they get varies from state to state.  But the maximum is $400 a week.

This money is quickly pumped back into the economy.  It has supported the rebound in consumer spending we’ve seen over the last year.

One thing’s for sure, it’s not the only reason.  But without these benefits, there’s no way consumer spending would have rebounded so quickly.

Don’t forget, growing consumer spending was a driving force behind the market’s recovery last year.  Cyclical consumer services companies are some of the best performing stocks since March 2009.

Here’s the problem.  Unemployed workers can collect a weekly benefit for 26 weeks.  After 26 weeks are up, they have to apply for extended benefits.

In May, the money for extended unemployment benefits ran out.  And new legislation to extend them was stonewalled by a Republican filibuster in the Senate.

Millions of people eligible for extended unemployment benefits couldn’t get them.

I don’t think it’s a coincidence retail sales, consumer confidence, and personal consumption (PCE) went into the tank in June.  I think it’s a direct result of the lapse in extended unemployment benefits.

Here’s the silver lining…

New legislation was signed last month to fund extended unemployment benefits.  Just last week, more than 1.2 million people began receiving extended unemployment benefits.  And with weekly benefits of up to $400, it adds up quickly.

It’s an additional $488 million in spending each week.  I think it’s enough to reverse the weakness we’ve seen in consumer spending over the last few months.

I don’t think the impact of these benefits is being accounted for in consumer services stocks.

What I’m leading up to is this… A rebound in consumer spending is going to catch a lot of investors by surprise.  You have an opportunity to grab consumer services stocks before they take off.

ETFs are an easy way to get exposure to the entire sector.

The iShares Dow Jones U.S. Consumer Services Sector Index Fund (IYC) is one of the best.

IYC holds 197 stocks.  They’re mostly retail, travel, and media companies.  The top holdings are Wal-Mart (WMT), McDonald’s (MCD), Walt Disney (DIS), Home Depot (HD), and Amazon.com (AMZN).

These companies will directly benefit from the extension of unemployment benefits.

Obviously it’s not good sign when you’re looking to unemployment benefits to drive consumer spending.  But it’s the reality of the moment.  And it’s creating a unique opportunity to profit from a rebound in consumer spending.

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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