In July, U.S. consumer spending increased significantly, indicating that worries about a near-term recession were probably overblown. These are great tidings for the financial markets and in particular for those who have been worried that economic weaknesses could upend the market rally. However, robust and steady consumption will likely dispel such fears sooner rather than later.

The report is largely in line with the tone witnessed in the latest second-quarter GDP data, which was fueled by consumer spending alone. This is why it still makes good sense to invest in consumer discretionary stocks, which derive strength from personal spending, widely acknowledged as the engine of the U.S. economy.

July’s Consumer Spending Beats Estimates

Consumer expenditure increased 0.6% in July, fueled by households’ purchases of a variety of goods and services. The increase exceeded the consensus estimate of 0.5% by a whisker and represents a solid improvement over June’s gain of 0.3%. Notably, consumer spending accounts for the bulk of U.S. GDP.

After accounting for inflation, consumer spending experienced a 0.4% increase in July. This is a major improvement over the 0.2% increase experienced in June. The improvement in core consumption expenditure indicates that consumption remains solid in the early part of the third quarter.

This is an encouraging development after the metric advanced at its fastest pace in four and a half years last quarter. Expenditure on goods increased 0.9% in July, fueled by higher spending on recreational products and sports vehicles. Expenditure on services increased 0.5%.

Strong Consumption Fuels Q2 GDP

The latest estimate for second-quarter GDP also indicated that consumption remains the dominant force when it comes to economic growth. The Department of Commerce raised its estimate for growth in consumer spending from 4.3% to 4.7% for the second quarter. The metric benefited from higher spending overall, especially on autos, apparel and restaurants.

Strong consumer spending also helped American businesses rack up their first increase in profits in three quarters. The 5.3% rise in adjusted pretax corporate profits was also the first since mid-2014. Higher spending also contributed to a decline in inventory accumulation during the second quarter. 

Our Choices

The latest data on the U.S. economy has successfully dispelled fears about a near-term economic slowdown. With American consumers remaining confident, the trend is likely to be sustained in the quarters ahead.

This is why investing in consumer discretionary stocks remains a prudent choice. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and good VGM Score. 

Skechers U.S.A., Inc. (SKX - Free Report) designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women.

Skechers has a VGM Score of A. The company’s projected growth rate for the current year is 17.4%. The Zacks Consensus Estimate for the current year has improved by 2.1% over the last 30 days. 

Rent-A-Center, Inc. (RCII - Free Report) is a lessor of household durable goods, which are provided on a rent-to-own basis.

Rent-A-Center has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 6.6% over the last 30 days. 

Crocs, Inc. (CROX - Free Report) is a designer, developer, manufacturer and distributor of casual footwear for men, women and children.

Crocs has a VGM Score of A. The company’s projected growth rate for the current year is 62.8%. The Zacks Consensus Estimate for the current year has improved by 12.5% over the last 30 days.  

Lincoln Educational Services Corporation (LINC - Free Report) is a leading and diversified for-profit provider of a career-oriented, post-secondary education in the United States.

Lincoln Educational Services has a VGM Score of A. The company’s projected growth rate for the current year is more than 100%. The Zacks Consensus Estimate for the current year has improved by 15.4% over the past 30 days. 

Funko, Inc. (FNKO - Free Report) is a pop culture consumer products company.

Funko has a VGM Score of B. The company’s projected growth rate for the current year is 48.9%. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 30 days.