Slower Growth Signaled by Wal-Mart Stock as Commodities Rise
March 14, 2011, 12:53 AM EDTBy Joshua Zumbrun
(Updates the price of a gallon of gasoline in paragraph 16)
March 14 (Bloomberg) -- Economists ignore volatile commodity prices when calculating inflation. The poorest families, who spend as much as 25 percent of their after-tax income on food and fuel, don’t have that luxury.
Rising prices “will shave a couple tenths off consumer spending, and the consumers that are going to get hit the most are at the lower end of the income scale,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. On March 11, he lowered his forecast for first quarter growth to 2.5 percent from 3.5 percent and second quarter growth to 3.5 percent from 4 percent, citing in part the persistence of higher energy costs.
America’s poorer families are suffering more than richer households as they face a bigger squeeze from the highest gasoline expenses in more than two years, stagnating wages and a jobless rate that has remained at or above 8.9 percent since April 2009. Their pain is shared by their preferred retailers, including Wal-Mart Stores Inc. and J.C. Penney Co.
“Rising gas prices and still-high unemployment levels weigh on the minds of our customers,” Bill Simon, U.S. chief executive officer of Bentonville, Arkansas-based Wal-Mart, said on a Feb. 22 earnings call. “Pressure from higher energy and commodity costs are factors that we will watch closely, as they affect our own logistics and transportation costs, as well as the prices the customer pays,” he said.
More Vulnerable
Wal-Mart, Plano-Texas-based J.C. Penney, Kohl’s Corp. and Kroger Co. in Cincinnati appear more vulnerable to gasoline inflation than Macy’s Inc., also in Cincinnati, Costco Wholesale Corp. and BJ’s Wholesale Club Inc., said Richard Hastings, consumer strategist at Global Hunter Securities LLC.
Hastings, who is based in Charlotte, North Carolina, analyzed survey data for 12 retailers from Worthington, Ohio- based BIGresearch.
Eighty-two percent of Wal-Mart shoppers earn less than $75,000 annually, compared with 63 percent at BJ’s and 55 percent at Costco, according to the BIGresearch data Hastings studied. Only 8 percent of Wal-Mart customers earn more than $100,000 a year, while the share is 28.2 percent at Issaquah, Washington-based Costco and 25 percent at BJ’s in Westborough, Massachusetts.
Since the start of the year, Wal-Mart stock has dropped 2.5 percent to $52.59. BJ’s is up 2.4 percent to $49.04, Costco has risen 0.5 percent to $72.55.
Reduce Consumption
As the squeeze from commodities puts immediate pressure on businesses to raise prices, it also tends to reduce consumption of non-necessities and thus over time eases some of the inflationary pressure on such goods and services.
“Costs are expected to be up significantly across all apparel categories, approximately 10 percent to 15 percent overall,” said Kevin Mansell, chief executive officer of Kohl’s. “We’ve been preparing for these cost increases for some time and have been working diligently to minimize” their impact on Kohl’s customers, who are “less open to paying higher prices for goods that are really discretionary.”
Half of shoppers at the Menomonee Falls, Wisconsin-based department-store chain said they’d be driving less and 29 percent would spend less on clothing in response to gas prices, according to the BIGresearch data.
One reason for the cutbacks is slowing wage growth. Average hourly earnings, adjusted for inflation, rose at a 1.9 percent annual rate in January, down from 3.9 percent in June 2007, six months before the recession began.
Poorest Consumers
America’s poorest consumers also have missed out on a two- year rally in equities as governments and central banks worldwide pumped more than $12 trillion into their economies to spur the recovery.
Before the slump, the median family in the lowest-earning 20 percent of the U.S. had $1,700 in financial assets, compared with $404,000 for the top 10 percent, according to the Fed’s Survey of Consumer Finances in 2007. The S&P 500 has soared 93 percent to 1,304.28 since the recession low of 676.53 on March 9, 2009.
The financial restraints on lower-income consumers mean they have less flexibility when food and energy prices climb. Families making $15,000 to $20,000 a year use 19 percent of their after-tax income for food and those earning $20,000- $30,000 typically use 18 percent, compared with 8 percent for families earning more than $70,000 annually, according to the Labor Department’s 2009 Consumer Expenditures Survey, released October 2010.
Gallon of Gasoline
Gasoline and motor oil account for 6 percent of spending for the lowest groups, compared with 2 percent for the over- $70,000 cohort. A gallon of regular gas cost $3.557 on March 12, the highest since October 2008, according to Heathrow, Florida- based AAA, the nation’s largest motoring organization.
“If you’re living paycheck to paycheck or you’re on a fixed income, the rise of gas prices impacts your habits,” said Troy Green, a AAA spokesman. “If you’re more affluent and can afford gasoline at any price, then you’re going to drive regardless.”
Fifty-one percent of Wal-Mart’s shoppers will be driving less as a result of fluctuating gas prices, compared with 44 percent at Costco and 46 percent at BJ’s, according to the BIGresearch data.
Core Inflation
Prices of all goods and services will rise 2.3 percent this year, according to the median forecast of economists in a Bloomberg survey, compared with 1.6 percent in 2010. The Federal Reserve prefers to focus on the core personal-consumption expenditures index, which excludes food and energy costs. The economists predict it will increase 1.1 percent, after rising at an annual rate of 0.8 percent in December and January, the lowest in records going back to 1960.
Gas and food prices traditionally are more volatile than other costs. The U.S. Department of Agriculture raised its forecast for food prices to an increase of as much as 4 percent this year, up from a January estimate of 2 percent to 3 percent, after a surge in costs of farm goods, Chief Economist Joe Glauber said Feb. 24 at a government-sponsored agriculture forum in Arlington, Virginia.
The department boosted its estimates for meats, eggs, cooking oils, fruits and vegetables, cereals and baked goods, and sweets as food inflation accelerates at the fastest pace since reaching a 28-year high in 2008, the USDA said in a Feb. 24 report. Higher costs for corn, the primary feed for pigs and chickens, may boost pork prices as much as 6.5 percent and eggs 4.5 percent.
‘Buy Chicken’
“There’s some substitutability for food, where if beef goes up faster than chicken, you might not like chicken as much but you buy chicken,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “On the energy side it gets a lot tougher. If you’re locked into a commute for your drive, you don’t have a whole lot of substitutability.”
Naroff, who accurately predicted the bursting of the housing bubble, says inflation could accelerate as much as 3.7 percent this year.
“There seems to be almost a sea change in attitudes toward price changes,” said Naroff, who added that some companies are starting to raise prices and see demand hold up.
The “high visibility” of food and fuel costs may “pose a little more risk for inflation dynamics this time than in the past,” Richmond Fed President Jeffrey Lacker told reporters Feb. 26. Even so, “economic conditions are likely to warrant an exceptionally low” target interest rate “for an extended period,” Fed Chairman Ben S. Bernanke said March 1 in testimony before the Senate Banking Committee.
Holding Rates Steady
The policy-making Federal Open Market Committee meets March 15, and investors see a 68 percent chance the Fed will hold its benchmark federal funds rate at a record zero to 0.25 percent through December, based on futures contracts on the Chicago Board of Trade.
Economists surveyed by Bloomberg News from March 4 to March 10 revised down their forecast for growth this year to 3 percent from 3.2 percent in February and predicted unemployment will average 8.8 percent, not much changed from last month’s actual 8.9 percent.
Their outlook helps explain a split in the Bloomberg Consumer Comfort Index, which dropped to minus 44.5 in the week ending March 6, the lowest level in a month, on surging gasoline prices. Sentiment suffered the most among respondents who lacked a full-time job or any employment and those earning less than $50,000 a year.
“The income divide is likely to become even more apparent in the year ahead, as the most vulnerable suffer disproportionate pain in the face of higher energy costs,” said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.
--Editors: Melinda Grenier, Kenneth Fireman
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
