The Weekly Standard
August 18, 2012
by Irwin Stelzer
"America goes shopping again," exulted one commentator. "The American consumer is back, big time," chortled another. "Retail sales increase notably more than expected in July reflecting across-the-board strength in sales," commented the more sober economists at Goldman Sachs, reporting a 0.8 percent increase, the first rise in four months. The figures surprised, exceeding the consensus forecast of 0.3 percent. Throw in the nascent recovery in the housing sector and policy wonks, for whom the real economy exists merely to provide grist for the policymaking mill, and talk quickly turned to just how Federal Reserve Board chairman Ben Bernanke and his monetary policy committee would react. The consensus is that those who are hoping that Bernanke will use the platform provided by the gathering of central bankers in Jackson Hole, Wyoming, later this month to launch QE3 are likely to be disappointed. The retail sales and other data, says Chris Williamson, chief economist at Markit, "argue against the need for additional stimulus from the Fed."
It is well to remember that it is risky to project from one data point, in this case July retail sales. For one thing, retail sales figures are notably volatile: these sales dropped by 0.7 percent in June before rebounding in July. For another, sales in the recently ended second quarter dropped by 0.6 percent compared with the first quarter, the largest rate of quarterly decline since May 2009. And as if to reaffirm economic right's title of the dismal science, economists at Société Général chime in with the thought that rising costs will likely depress real spending by consumers in coming months, "hinting at another round of downward adjustments to economists' Q3 GDP growth forecasts." So, to borrow from George Gershwin's description of woman, the July retail sales figures may prove to be "a sometime thing." If Bernanke believes that, and if the next jobs report proves to be unpleasant, he just might find some way to ease monetary policy further, to the applause of stock traders and the moans of those who worry about inflation and the recent uptick in yields on U.S. treasury IOUs.
Perhaps the best way to see what the sales figures tell us about the state of the U.S. economy is to dig into the reports of several leading retailers, a process that inevitably starts with Walmart, the world's largest retailer by revenue. Its revenues were up 4.5 percent over July 2011, due largely to growth overseas, which account for more than a quarter of the company's revenue. But CEO Mike Duke warns that Walmart's primarily low-income customers remain bound by the "paycheck cycle," doing most of their buying on the day they receive their paychecks, and are being hit by higher gasoline prices. Prices at the pump took analysts by surprise by jumping almost 10 percent in July, making it likely that 2012 will record a record high in petrol prices, which is worrying the Obama administration enough to have it trying to talk down prices by hinting that it might release crude oil for the Strategic Petroleum Reserve.
The nation's second-largest retailer, Target, also reports that its lower income and somewhat better off customers continue to struggle. Revenues were up in July, mostly due to sales of non-discretionary items such as food and health care products, but it took "Christmas in July" discounting and 5 percent paybacks on the company's credit card sales to boost volumes. Ominously, bad debt expenses in the credit card division soared.
To add to the picture at the lower end of the income scale we can look to Sears and J.C. Penney. Sears is a special case, with chairman Eddie Lampert trying to reverse a slide that Columbia University professor Eric Abrahamson says has it staying alive by selling parts of itself (it has sold stores and other assets), but "permanently failing" as a retailer. Penney is wallowing in red ink ($132 million in the first quarter), as customers accustomed to discounts shun its new every-day low price, "fair and square" policy, and seem to be migrating to Macy's, which reports that stores in malls also occupied by Penney are growing rapidly. Penney lured Ron Johnson, its new CEO, from Apple, where he ran that company's spectacularly successful retail operations. His efforts to introduce some of Apple's techniques into Penney's operations have not paid off (he would add, "yet"): sales fell almost 22 percent in July compared with last year, and sales per square foot came to a meager $135, compared with $6,123 for Apple, according to analysts at RetailSails.
That should be no surprise. I prowl malls whenever I travel on business, and can't help noticing that Apple stores swarm with excited customers while copycat Microsoft retail outlets echo to the footsteps of the few curious who drop in. It takes more than copycat stores to generate sales.
Consumers' addiction to discounts is not confined to those at the lower end of the income scale. Gap's sales jumped 10 percent in July, in part because of more attractive merchandise, but also because of heavily promoted discounts. And Coach, the high-end handbag and leather goods retailer, reports that it failed to grow significantly in the second quarter because it stopped offering discount coupons at its factory outlet stores. Coach has reinstated coupons.
There is more news from the retail sector that tells us a great deal about the American economy. Sales at Staples, the office supply chain, and Best Buy, the electronics retailer, are dwindling, so much so that its former managers are attempting to wrest control from the new bunch. The likely cause of these once-mighty retailers problems: competition from discounters such as Walmart and Internet sellers such as Amazon, combined with those companies' inability to come up with viable competitive responses. Amazon's sales were up 29 percent in the second quarter, as it continues to sacrifice profits in order to woo customers from shops and malls, and to invest in distribution centers that some day might provide same-day delivery, a thought that must keep other retailers awake at night.
Sales data also suggest that the day on which retailers could rely on free-spending teens is over. Abercrombie & Fitch, the trendy chain of choice for young customers attracted to its dark, noisy stores, featuring posters of well-toned male midriffs, saw its second-quarter earnings drop by more than 50 percent on very disappointing sales, especially in Europe but also in the U.S. Teenage unemployment both in Europe and the U.S. is around 25 percent, but European sales were also hit be the recession. In the U.S., Abercrombie's experience parallels that of other chains catering to this age group, where almost one-in-four 16 to 19 year olds cannot find work, and parents seem unwilling to support the lifestyles to which these teens had become accustomed.
Higher-end retailers are doing better, although the reduced flow of well heeled European tourists to New York and other cities is a negative. And well established specialty brands continue to grow: perhaps in response to the impetus and incentive provided by the runaway sales of 50 Shades of Grey, Limited's Victoria Secret, which sells £4 billion of its fetching lingerie annually, racked up a 12 percent increase in sales.
There you have it. Retail sales don't tell us much about the outlook for the economy or for further Fed easing: one rose does not a summer make. The Internet remains a source of Schumpeterian creative destruction, with Amazon doing a great deal of the damage to office suppliers and electronics retailers. Imitating Apple's retail success is not easy. High levels of unemployment among youngsters are hitting their preferred retailers. Overseas sales by U.S. companies are shrinking, as Europe lurches into recession. And sex still sells.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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