August 16, 2013 in Business

Sales slowdown raises recovery doubts

Consumers feeling pinch of weak pay, higher taxes
Associated Press
 
Associated Press photo

Shoppers walk the aisles at a Wal-Mart in Bristol, Pa., recently. Wal-Mart says its customers are spending less.
(Full-size photo)

WASHINGTON – Bleaker outlooks at retailers like Wal-Mart and Macy’s are raising doubts that consumers will spend enough in coming months to lift the still-subpar U.S. economy.

Though the economy is growing steadily, Americans are being hampered by weak pay, higher taxes and tepid hiring. Sluggish overseas economies are also slowing sales for U.S. retailers. It’s a picture the Federal Reserve will weigh in deciding whether to scale back its bond purchases as soon as next month.

“Consumers aren’t going to start spending with abandon until we see much stronger job and wage growth,” said Mark Vitner, an economist at Wells Fargo.

Average weekly paychecks have grown just 1.3 percent since the recession ended more than four years ago. Over the past 12 months, pay has trailed even low inflation. That’s partly why spending has remained lackluster and why many Americans may be postponing purchases at department stores so they can buy cars, homes and other costly necessities.

Americans increased their spending at an annual rate of just 1.8 percent in the April-June quarter – down from a 2.3 percent rate in the January-March period. Consumer spending is expected to improve in the second half of the year. But most economists foresee only a slight acceleration to an annual rate of 2 percent to 2.5 percent.

Those spending rates are historically weak. And they’re too meager to significantly boost the economy, which grew at an annual rate of just 1.4 percent in the first half of the year. Consumer spending fuels about 70 percent of the U.S. economy.

The trend has weakened sales and profits at retailers like Macy’s. On Wednesday, Macy’s reported a disappointing profit for its second quarter and cut its outlook for the year.

And Wal-Mart, the world’s biggest retailer, issued an earnings report Thursday that intensified worries about the strength of U.S. consumers, long a driving force for the global economy.

The Bentonville, Ark.-based discounter said it expects economic strains in the United States and abroad to squeeze its low-income shoppers the rest of the year. Wal-Mart is considered an economic bellwether: It accounts for nearly 10 percent of nonautomotive retail spending in the United States.

The company attributed its gloomier report in part to a Social Security tax increase that’s reduced most Americans’ paychecks this year. Charles Holley, Wal-Mart’s chief financial officer, said its customers appear reluctant to buy discretionary items like flat-screen TVs.

The state of the American consumer will be a key factor the Fed will consider in deciding whether to scale back its $85 billion a month in Treasury and mortgage bond purchases. Those purchases have been intended to keep rates on mortgages and other long-term loans near record lows.

Chairman Ben Bernanke and other Fed officials have said the central bank could start slowing its bond purchases later this year if the economy continues to strengthen. Many economists think a slowdown will be announced at the Fed’s next meeting on Sept. 17-18.

Retail analysts note that back-to-school sales have been slow so far – potentially a worrisome sign for winter holiday sales late this year. If back-to-school business falls below expectations, stores could pare their holiday orders, Perkins said. That would slow production at manufacturers.

Though the economy officially emerged from recession in June 2009, many consumers remain reluctant to buy goods that aren’t discounted, said Sung Won Sohn, an economist at California State University.

Retailers who cater to middle- and lower-income shoppers have suffered in part because their customers haven’t benefited as much from the recovery. Rising stock prices and home values have mainly benefited upper-income Americans.

Yet even some retailers that serve upper-income shoppers are dimming their forecasts. For example, Nordstrom, a barometer of luxury spending, on Thursday reduced its sales outlook for the year. The company issued its report after the stock market closed, and its stock sank in after-hours trading.

Wal-Mart has said its lower-income consumers, in particular, have been squeezed by this year’s Social Security tax increase. The tax increase has meant that a household earning $50,000 has about $1,000 less to spend this year.

The company is also being hampered by persistent economic weakness in Asia, Latin America and elsewhere. Wal-Mart said consumers in both developed and emerging economies held back on spending in the first half of the year, citing sluggish sales last quarter in Japan and Mexico.

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