The Consumer and the Stock Market Storm

(page 2 of 2)

Unlike the Michigan survey, the RBC Consumer Attitudes and Spending by Household (CASH) Index is based on surveys done over a three-day period once a month. The latest surveys were conducted during the weekend the Treasury stepped in to nationalize mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), before Lehman Brothers filed for bankruptcy and American International Group (AIG) was saved by an $85 billion federal bailout — the events that triggered new alarms in the financial crisis. That suggests the October confidence reading could revert back to the all-time low hit in July or even worse.

Dropping the Shopping

Battered confidence may already be evident in one of the more important consumer-facing sectors: retailing. This year's back-to-school season was especially weak, with August sales at stores open at least one year up 1.7% from last year but unchanged from a year ago when Wal-Mart Stores' (WMT) strong results were excluded, the International Council of Shopping Centers said in a Sept. 4 release. The National Retail Federation reported a 1.1% increase in August sales but a 0.4% decline when including non-general merchandise categories such as autos, gas stations, and restaurants.

Sales have fallen off sharply over the past couple of weeks, as consumers have had to grapple with a torrent of financial developments, says Lizabeth Dunn, a retail analyst at Thomas Weisel Partners (TWPG) in New York. "They figured out their money market funds aren't as safe as they thought, and now they have to be worry about which banks they have their money in," she says. "It's very unsettling." Continuing evaporation of home equity and further weakening on the jobs front are also causing turmoil for the average household, she adds.

The latest pullback in spending is "squarely tied to what's going on in the financial market," she says. Still, she doesn't think the recent drop-off in spending will turn into a new trend. Men's and children's segments have held up better than the women's segment, which has been harder hit because women's purchases tend to be more discretionary, while buying for kids and men is based more on necessity, she says. "You're seeing people on a broad scale delaying purchases. You delay home improvements and car purchases," she says. "If your normal replenishment cycle is every year, now maybe its every two years."

Stressed-Out Consumers

While Lockwood at Mintel doubts that consumer purchasing habits have changed with the escalation of events in the financial arena, he does believe that consumers are already as stressed as they can be. Still, the focus for most people is changes in prices and what happens in the financial markets "has no meaning for people until it gets down to the wallet level, and that's not likely to happen anytime soon," he says.

Even where people may still be shopping, they are falling increasingly behind in paying their bills. High-end department store chain Nordstrom's (JWN) latest data on its securitized credit-card receivables for August showed total delinquencies climbed 0.71% from a year ago, to 2.83% of total receivables, and were up 0.28% from July, according to a Sept. 15 research note by Credit Suisse (CS). Those were the largest upticks, on both a monthly and year-on-year basis since the data became publicly available in May 2007. Nordstrom is one of the few retailers that still owns the receivables of its credit-card business, which contributed 2% to the company's total earnings before taxes last year, analyst Michael Exstein said in the note.

Retailers' earnings in August implied a decline in the two-year trend for comparable sales, says Dunn at Thomas Weisel, who also says she's hearing that business has worsened in the last two weeks. So far, only one of the companies she covers — Cache (CACH)— has actually cut its profit outlook, but she cautions that not much should be read into that since Cache is a relatively small company.

Smaller retailers, such as Lululemon Athletica (LULU) and Urban Outfitters (URBN) continue to attract new customers and perform well. But as for bigger, more established retail names, "there aren't really any I see that are bucking the trend," she says.

You can bet that if consumers lose sleep in the next few weeks amid new developments in the bailout drama and financial crisis, the outfits that depend on their business will not be getting much rest either.

Bogoslaw is a reporter for BusinessWeek's Investing channel.