Consumers Feel a Chill


February sales fell at a range of retailers. For some analysts, the cold-weather explanation doesn't ease fears of an extended spending slowdown

Was it just the weather? Or are consumers showing the first signs of pulling back?

Whatever the case, it sent a chill down investors' spines to learn that shoppers stayed away from all sorts of stores in February, from clothing retailers to furniture and book stores. According to the U.S. Commerce Dept., sales fell 0.3% at electronic stores, 1.2% at restaurants, 1.8% at clothing stores, and 1.7% at furniture retailers.

The only bright spot was automobiles and parts, which rose 0.9%. "This was inevitable and a consumer slowdown was overdue," says Richard D. Hastings, vice-president and senior retail analyst at Bernard Sands. Anxious investors sent the Dow Jones industrial average down 242.66 to 12,075 (see BusinessWeek.com, 3/13/07, "Stocks Tumble On Mortgage Woes").

Household Concerns

Not everyone, however, reads this as a sign that the economy will soon be derailed. Economists point to an unusually cold February that led to the anemic sales at retailers. Indeed, according to the National Climatic Data Center in Asheville, N.C., it was the country's coldest February since 1994. The Commerce Dept. reported that overall retail sales rose 0.1% last month after a flat reading in January. "Weather was a big downside," says Michael Englund, chief economist at Action Economics, an economic analysis firm. "But, overall, underlying fundamentals are strong."

Englund is certain that the low unemployment rate of 4.5% and healthy wage growth will prop up spending by consumers, who account for two thirds of U.S. economic activity. However other economists aren't sure. The slump in the housing market continues to weigh on people's minds, short-term interest rates are hurting many consumers' abilities to pay down credit-card debt and pushing up rates on their home equity loans, and gasoline prices are slowly creeping up again. "Let's face it, a big chunk of the households' net worth is vested in their houses, and if people keep hearing of problems and weakness in the housing market it's going to keep them at an edge," says Brian Bethune, economist at analytics outfit Global Insight.

Consumers were certainly quite conservative in their spending last month. A case in point is Wal-Mart Stores (WMT), the largest U.S. retailer and one that is viewed by many as a bellwether of U.S. retail sales overall. In February, sales at Wal-Mart stores that have been open at least a year rose just 0.9%. The company blamed bad weather for the weakness. Results from Aeropostale (ARO), Claire's Stores (CLE), and AnnTaylor Stores (ANN) are expected later this week.

Eyes on March

Wal-Mart also said it expects continued sluggishness in March, forecasting a same-store sales gain of a mere 1% to 2%. If Wal-Mart's expectations translate into similarly weak sales at retailers overall, it could be a problem. Skittish economists are already lowering their forecasts for the quarter. David Greenlaw, an economist at Morgan Stanley, lowered his forecast for consumer spending in the first quarter to 3.2%, down from 3.7%, after the retail sales report.

But others are willing to wait a little and watch. "March will be a litmus test for consumers," says Bethune of Global Insight. "We had a great last couple of months in 2006, so a pullback in January and bad weather in February is O.K. But if March turns out to be a bad month, then we will have to worry."

Gogoi is a contributing writer for BusinessWeek.com.

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