Modest improvements in the job market and increasing household wealth, which is the result of higher home values and higher stock market returns, have given some American consumers the confidence to spend. That is good news for the economy, because consumer spending accounts for approximately 70 percent of the country’s gross domestic product. And because government and business spending has remained weak, the economy is depending even more on household spending to fuel growth. But for others, the tougher economic environment brought on by higher taxes and lower government spending has hurt discretionary spending.
Wal-Mart’s (NYSE:WMT) second-quarter results reflect that environment. Last week, the discount retailer reported that sales at stores open for at least one year dropped 0.3 percent in the United States, the company’s largest region of operations, while Wall Street was expecting sales to rise 1 percent. The decline in sales came, in part, as a result of the 0.5 percent drop in the number of visits from its U.S. customers, who are struggling after being hit by January’s payroll tax hike and the ongoing shaky labor market recovery. The company also gave concerning guidance for the second half of 2013.
That news chopped 225 points off the Dow Jones Industrial Average on Thursday. Now, Wall Street is worrying that the “Wal-Mart effect” could spread to other U.S. retailers. But so far, while J.C. Penney (NYSE:JCP) reported a hefty and not-unexpected loss Thursday, Home Depot (NYSE:HD), the U.S.’s biggest home-improvement retailer, beat expectations.
“Business was weaker in apparel-specialty stores, discounters, dollar stores and drug stores compared with the year-earlier period,” said International Council of Shopping Centers chief economist Michael Niemira in the institute’s weekly reading on the health of the retail sector. However, “business was much stronger for electronics stores, book stores and modestly stronger for department-stores and other back-to-school shopping venues.”
When the Department of Commerce announced last week that July retail sales increased just 0.2 percent, economists saw that growth as a sign that consumers had spent cautiously that month and that the economy has remained relatively weak after a tough spring. The U.S. economy grew at an anemic 1.7 percent annual rate in the second quarter, and while many economists expect the growth rate to pick in the second half of the year, that largely depends on the whether consumers spend more.
“Nothing looms larger than the health of the consumer in a second-half pickup,” economists at Citigroup wrote last week in a research note seen by The Wall Street Journal. But the still stubbornly high unemployment rate, stagnant wages, and higher payroll taxes have left consumers cautious, keeping purchases to their immediate needs.
In general, weekly snapshots of the retail sector have shown modest improvements throughout August, an indication that economists’ expectations for the second half of the year have already begun to be fulfilled. But the week ended August 17 put that growth theory in question. On both a monthly and yearly basis, the ICSC-Goldman Sachs Index and the Johnson Redbook Index showed either contraction or weaker growth than in the previous week.
Same-store sales at chain stores fell sharply, according to the ICSC-Goldman Sachs Index, decreasing 1.9 percent week over week after contracting 0.2 percent in the previous week. In general, the weekly growth rate has been volatile in recent readings, but the year-over-year rate, which has steadily been edging higher, changed course. Following last week’s 2.6 percent jump, which pushed the four-week moving average to its highest point since mid-June, the index grew at a slightly slower rate of 2.2 percent.
Similarly, the Johnson Redbook Index showed that year-over-year sales strengthened at a more modest pace than in the previous week. The 3.4 percent rate of growth recorded for the past week compares with the previous week’s reading of 3.7 percent. Redbook’s August-to-July comparison grew 0.2 percent after expanding 0.4 percent the week before.
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