The Economy: Key Signals Beyond the Bailout

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Warehouse Clubs

Although inflated gasoline and food costs were enough to send consumers into hiding until a few weeks ago, discount retailers like the warehouse clubs have benefited from the cash crunch. The latest quarterly results for industry giants like Costco (COST) and BJ's Wholesale Club (BJ) could continue to provide hints about the state of the economy, but the focus should be on sales volumes rather than profits, which can be adversely affected by unusual cost factors, says Doug Roberts, chief investment strategist for ChannelCapitalResearch.com in Shrewsbury, N.J. If discount retailers start having problems, "that may mean people aren't spending at any price," he says.

Continued growth in Costco's revenues has stemmed from the company's merchandising skills and insistence on its "value message in a difficult economy," Stifel Nicolaus (SF) analyst David Schick said in a Sept. 3 research note. Same-store sales for Costco's core business—excluding gasoline and the foreign exchange impact—rose 5.8% in August from a year ago, slightly above the range over the past 12 months, the note said.

BJ's isn't showing signs of slowing either. BJ's reported a 15.4% gain in same-store sales and a core merchandise gain (excluding gasoline sales) of 7.7% in August, positioning it well for solid earnings, according to a separate Stifel note on Sept. 3. BJ's strength has been in breakfast foods, meats, frozen foods, health and beauty, and household chemicals, while sales of televisions, air conditioners, jewelry, and cigarettes have been weaker.

Community Banks

Regional banks may also shed some light on the health of the economy if they start having liquidity problems, which, until now, have been confined mostly to the large investment and money center banks, says Roberts at ChannelCapitalResearch.com. A big increase in defaults at these smaller consumer banks would offer further evidence that credit problems are spreading from Wall Street to Main Street, he says.

Early delinquencies on residential mortgage and home equity loans—where payments are 30 to 89 days late—were rising in the second quarter at most of the regional banks in the Southeastern U.S. that analyst Kevin Fitzsimmons covers for Sandler O'Neill & Partners, and that hasn't abated, he says. Early delinquencies are a leading indicator for loans to migrate into the non-accrual category, where they no longer generate income for lenders.

Banks are saying they're now watching commercial and industrial and auto loans more closely but are not seeing anything very alarming yet, says Fitzsimmons. "The thing we may hear from companies [when they report earnings] in the coming quarter is that while they were very hopeful credit deterioration would remain confined to areas we spoke about before, that with what's happening to the economy…it's going to have an effect on these other sectors as well," he says.

In a Sept. 24 research note for Friedman Billings Ramsey (FBR), regional bank analyst Scott Valentin warned of greater losses on commercial and industrial and construction loans over the next year than what many investors may be expecting.

The ongoing, increasingly contentious tussle over the government's massive bailout of Wall Street will remain center stage in the days to come. But investors should keep their eye on other corners of the economy even as the debate rages on.

Bogoslaw is a reporter for BusinessWeek's Investing channel.