Rising Retail Sales Ease Fears for Economy

Source: WSJ

By CONOR DOUGHERTY and SHELLY BANJO

Aug 14th

Pedestrians in New York pass signs for discounted clothing sales in July. U.S. retail sales rose last month by the largest amount in five months.

Americans cracked open their wallets last month, stepping up spending on everything from clothes to cars for the first time since March and easing fears that the fragile job market and weakness overseas are stalling the U.S. economy.

Retail sales rose 0.8% in July from a month before, the Department of Commerce said Tuesday, ending a three-month streak of declines that included a 0.7% drop in June and a 0.1% drop in May.

Consumer spending accounts for about three-quarters of demand in the U.S. economy, so a sustained upturn there, as well as a revival in confidence, are crucial to fueling growth.

Some economists pointed to the hot summer-which prompted spending on things like air conditioners-and an early push by retailers to lure back-to-school shoppers as possible factors behind last month's retail-sales gains.

The increases were widespread, with every major category pointing up. Restaurants, auto dealers, electronics stores and online retailers all notched plump gains.

The retail report is the latest economic gauge to suggest the U.S. began the third quarter on a stronger footing than the second, when growth slowed to a meager 1.5% annual rate.

Still, July's retail report is unlikely to put to rest concerns at the Federal Reserve that the economy is growing too slowly to significantly reduce unemployment.

Some private forecasters said they weren't substantially upgrading their third-quarter growth forecasts in light of the retail figures. Macroeconomic Advisers said it was sticking to its forecast that the economy would grow at a 2% annual rate in the third quarter, and Action Economics said it expected 1.5% growth. The Fed has signaled that barring a substantial improvement in the growth outlook, it is leaning toward new actions to spur the economy.

Some retailers say extreme weather such as hailstorms and heat waves may have contributed to the jump in spending. "You can't underestimate the impact of heat on consumer spending," Carol Tomé, chief financial officer of Home Depot Inc., HD +3.58% said.

The country's largest home-improvement retailer, which reported a 12% increase in second-quarter earnings Tuesday, said this year's early spring pulled forward seasonal sales of patio equipment, outdoor grills and other items into the first three months of 2012. Shoppers typically buy that equipment shortly before summer but this year bought in February or March. More recently, the hot summer and drought boosted demand for big-ticket purchases like air conditioners.

Andy Laats described consumer demand today as "ridiculously inconsistent." Mr. Laats is chief executive of Nixon Inc., an Encinitas, Calif., maker of watches marketed to skateboarders, surfers and other sports enthusiasts. He says lately retailers have been trying to cut back inventory exposure by shifting to more frequent, smaller orders from seasonal orders with a longer time horizon. That puts his company in the position of having to predict fickle consumer demand. Mr. Laats said retailers "don't want to miss a sale, but they also don't want to commit to having the wrong stuff on the shelf."

Consumers continue to be thrifty, as they comb many stores in search of the best deals, postpone discretionary purchases and save a greater proportion of their paychecks. The personal saving rate, the proportion of income leftover after spending and taxes, rose to 4% in the second quarter from 3.6% in the first, a sign consumers are choosing to save more instead of spending. The few exceptions tend to be gas, groceries, and back-to-school items, analysts say.

Some retailers may be benefiting from the early back-to-school shopping season. In June, stores such as Gap Inc.'s GPS -0.06% Old Navy, Macy's Inc. M +0.98% and Target Corp. TGT +1.39% began stocking shelves with backpacks, pencils and school uniforms, as well as launching school promotions.

Back-to-school shopping tends to hold up even in a tough economy as parents put school spending before other discretionary purchases.

Another lift has come from the housing market, where both prices and sales have improved this year. Home Depot said its business is gaining in some of the hardest-hit housing markets like Florida and California, where customers are remodeling kitchens and spending on simple projects such as adding wood floors, window treatments and special-order carpeting.

"As housing prices stabilize or increase, homeowners have a greater willingness to invest in their home," said Barclays BARC.LN +1.48% analyst Alan Rifkin.

Penny-pinching bodes well for dollar stores and discounters like Wal-Mart Stores Inc. WMT +0.83% and Target Corp., often at the expense of midtier department stores and consumer electronics retailers.

After several quarters of strong sales, stagnant employment and stock market returns coupled with uncertainty around the coming presidential elections and potential tax policy changes are starting to weigh on luxury retailers like Saks Inc., SKS +6.18% which reported a second-quarter loss of $12.3 million, or eight cents a share, on Tuesday.

"You look at the July retail-sales numbers and you say this doesn't look like an economy that is getting progressively worse but it looks like an economy that is growing with ups and downs around a pretty sluggish trend," said Nigel Gault, an economist at IHS Global Insight.

Mr. Gault said many questions about the economy's trajectory have yet to be answered. Much of Europe is in recession or expanding slowly, while formerly booming economies such as China are starting to slow. In Washington, Congress has yet to deal with federal tax increases and spending cuts set to take effect at the start of 2013.

One cloud on the economic outlook: Consumers are likely to feel a pinch from higher prices. While on the whole, consumer-price inflation remains tame, gasoline prices increased in August, eating up some of consumers' disposable income.

Meantime, the Midwestern drought is set to push up food prices in coming months. A separate report Tuesday reflected food prices on the upswing. Prices paid by wholesalers increased 0.3% in July from a month earlier, led by a 0.5% in food prices that have been driven by higher meat prices, the Labor Department said.