Wall Street Journal, Aug 19, 2009. 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 Chief Executive Frank Blake told investors Tuesday that he didn’t expect a year-over-year increase in same-store sales until the second half of 2010. “We remain concerned by the high level of foreclosure activity, which we believe continues to put pressure on the housing markets,” he said.
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 all but basics. 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.
“A real recovery will be driven by two things: real estate and consumer spending. If that is true, we have a very long way to go.”
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.