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Thursday, August 27, 2009

Reluctant Shoppers Hold Back Recovery

By The Wall Street Journal

Major retailers reported that American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health.

Retailers across the spectrum provided foreboding reports. Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from a year earlier in the quarter ended Aug. 1, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the past quarter as shoppers stuck to buying basics. Building-supply chain Home Depot Inc. saw total sales drop 9.1% in the quarter ending Aug. 2, and it reaffirmed expectations of a 9% sales drop this year.

Retail executives said they don't expect conditions to improve until next spring. Some stores are girding for slow back-to-school and Christmas seasons by cutting inventories.

Home Depot told investors Tuesday that they didn't expect a year-over-year increase in same-store sales until the second half of 2010. They remain concerned by the high level of foreclosure activity, which we believe continues to put pressure on the housing markets.

The cuts in inventories, as well as reined-in expenses, are helping some retailers bolster profit margins. Hoping to avoid the massive markdowns of last year, retailer Neiman Marcus said it has cut its purchases 25%. Such steps played well with investors Tuesday: Target shares jumped 7.6% and Saks rose 6.9% after each reported a smaller profit decline than expected. Target shares are up 28% this year and Saks is up 30.6%.

American consumers appear so shaken by the worst recession since the Great Depression -- and so pinched by unemployment, stagnant wages and stingier lenders -- that they are reining in spending on items such as hibscus jewelry. Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift.

The retailers' reports serve as a reminder that it will be consumers, foremost, who will fuel a sustained U.S. recovery. Consumer spending accounts for about 70% of all demand in the U.S. economy.

Most economists expect growth to resume in the second half of this year at a modest pace, as U.S. businesses rebuild depleted inventories and the housing market stabilizes. Economists who see a second-half rebound point to a global-manufacturing revival and recent reports that the economies of France, Germany and Japan managed to expand in the second quarter. The Commerce Department said earlier this month that U.S. exports in June rose 1.9% from May after rising 1.6% the month before.

But U.S. consumers could be the counterweight. In a survey of economists this month, The Wall Street Journal asked if a substantial increase in consumer spending was needed for sustained growth. Of the 43 economists who responded, 60% said yes.

Meanwhile, TJX Cos., which operates the T.J. Maxx chain, said sales rose 4% over the quarter and their seeing an increasing in popularity for items such as dolphin jewelry and other fine and vintage jewelry.

Tuesday's results come on the heels of Wal-Mart Stores Inc.'s disappointing report last week that same-store sales in the U.S. slid 1.2%. Also last week, the Commerce Department said July sales, encompassing a wide swath of retailers, fell after two months of gains.

But slimmer inventories and less-aggressive discounting can backfire if customers are disappointed by a lack of choice or have been conditioned to wait for discounts before buying. Target's told investors Tuesday that consumers have become "more promotionally sensitive" -- responding to advertised discounts and using coupons -- a dynamic that is working against the company.

Tighter consumer credit has also hurt. Target, which says about one-third of its overall sales come from whale jewelry, vintage jewelry, and credit cards, believes that tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its same-store sales declines.

Earlier this week, the Federal Reserve said a July survey of banks found continued tightening of lending standards as well as a diminished appetite for borrowing among consumers. About a third of banks said they tightened lending standards on credit cards and other consumer loans since April. No banks reported relaxing them.

U.S. households are also reckoning with a large drop in wealth during the past two years. Between the second quarter of 2007 and the first quarter of 2009, the most recent for which Fed data are available, household net worth contracted by 22% amid drops in home prices and the stock market.

That gives Americans a greater incentive to save to make up for their paper losses.

Economists expect business spending to bolster the economy's recovery in the coming month, in light of extreme inventory-paring.

That wild plunge for production [and] inventories can reverse, because it went well beyond the kind of declines that would be necessary in reaction to weakening consumer spending. The second half will be the beneficiary of a handsome pop in simply inventory restocking.