As I recently discussed, there has been a move toward discount and big-box stores in the retail sector and some cracks are forming in luxury stocks (albeit, I believe the rich will bounce back), as consumers remain hesitant to spend.
The problem that would likely impact renewal in the retail sector is jobs. We need to see the unemployment rate decline from the current 8.3%. The addition of 163,000 jobs in July will help with the confidence level of consumers in the retail sector, but this is only one reading, and we want to see a positive pattern across readings. If jobs continue to rise, this would likely translate into higher sales in the retail sector.
The monthly retail sales numbers in the retail sector are showing some encouraging signs. The Thomson Reuters Same Store Sales Index (comprised of 18 U.S. chains) increased a better-than-expected 4.3% in July, which was well above the 1.5% estimate and the muted 0.1% increase in June. While this is encouraging, there’s a lot of work ahead for the retail sector.
Consumer confidence in July was encouraging with a reading of 65.9, above the estimate of 61.0 and the upward revised 62.7 in June. Take a closer look. Economists feel a reading of 90 indicates a healthy economy. This has not materialized since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession readings of 90. This cannot be good for the retail sector.
The reality is that when consumers are cautious, they tend to hold back on any major purchases in the retail sector, such as homes, vehicles, furniture, appliances, and travel. This will impact spending and GDP growth and the ability of companies to expand their businesses.
The Durable Goods Orders reading for June increased 1.6%, which appears to be good and above the estimate of 0.3%; but factor in the transportation element, and durable orders fell 1.1% versus the estimate calling for a decline of 0.1% and the 0.8% reading in May.
These are not readings you can get excited about for the retail sector.
You also have the hyped-up housing sector. (Read “Housing Still Weak Despite What Media Says.”) Housing starts and building permits are showing some life, but home prices continue to fall. The Case-Shiller 20-city Index contracted 0.7% in May following a 1.9% decline in April. Lower home values translate into less home wealth and less desire to want to spend until the situation improves, based on my market view. A strong housing market is important as homeowners buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high home foreclosures and short sales where homes are dumped below the mortgage value.
Until we see consistent and strong jobs growth along with stable or higher home prices, consumers will likely continue to be hesitant to spend, and the retail sector will suffer.