Checking the Pulse of the Retail Sector

The jury is still out on consumer spending this year and its impact on the retail sector and GDP. The key drivers for spending are jobs and wealth generation from such sources as stocks and housing. In 2011, all of these variables were absent, but spending managed to edge higher.

Retail sales in the U.S.are estimated to rise 5.1% year-over-year in January, but then post three successive down months, bottoming at 1.5% year-over-year growth in April before steadily rising from May to August, according to The Financial Forecast Center. But while this growth sounds promising for the retail sector, there are other pundits that aren’t as positive. Retail Metrics predicts retail sales to grow two percent in January versus 4.3% in January 2011.

In December, retail sales excluding auto contracted 0.2%, down from 0.3% growth in November. The January reading will be reported in a few weeks.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart (NYSE/WMT), Target (NYSE/TGT), and Costco (NASDAQ/COST) stores, along with the popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Job creation is the most vital variable for the retail sector. The weekly initial claims have fallen below the threshold 400,000 level for weeks. In December, 212,000 jobs were created. The January reading is estimated to show the creation of 168,000 new jobs, but this is not good. The unemployment rate stands at 8.5%, which is too high for a healthy economy and could strangle growth in the retail sector. The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel that the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until at least 2013.

A strong U.S. housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. Just take a look at the stalling electronic and furniture sales.

The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending; thereby impacting the retail sector.

The reality is that foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 until prices start to steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

General Motors Company (NYSE/GM), may be struggling with sales at home, but in China, consumers want GM cars! You can read my discussion in General Motors: China’s Top Foreign Automaker.