Bad News on the Consumer Spending Front

Wal-Mart, the world’s largest retailer, announced yesterday that it expects same-store sales this June to be only 2% to 4% higher than in June 2003.

This is big news because Wal-Mart had previously expected June same-store sales to be 4% to 6% higher than last year. In essence, the retailing mammoth has cut its June 2004 sales growth forecast by 50%.

To this simple economist, Wal-Mart is the retail market. Over one million customers file through Wal-Mart stores weekly. Annual sales are well over $100 billion. And with about 1.4 million employees, I’m not aware of a bigger employer outside of government.

Wal-Mart’s marketing staff works hard to introduce new products, cut product prices at existing stores, and expand product lines. For example, Wal-Mart recently became the biggest retailer in the world of toys, beating out Toys ‘R Us. Hence, to see same-store sales increase only 2% to 4% annually, given the broader and cheaper range of products Wal- Mart stocks today compared to last June, could actually be interpreted as consumer spending retraction.

Now, in all fairness to Wal-Mart and the economy, the company did cite cool weather conditions as the reason sales for June were weak. But Wal-Mart also said it experienced disappointing Father’s Day results.

The poor results at Wal-Mart are in keeping with the key points I’ve been stressing in PROFIT CONFIDENTIAL, namely:

— Cheaper goods imported from China are actually lowering prices, reducing the amount consumers spend, and importing deflation.

— Consumers are not spending as much as they used to, even on low-end goods such as Wal-Mart products.

— All the talk about higher interest rates is having a bigger impact on consumer spending habits than we have been led to believe by the popular media.

— Despite great job growth this year, we have well over one million more unemployed Americans today than we did before the tech bubble burst and at least another one million Americans have entered the work force since then.

Having Wal-Mart deliver consumer-spending patterns on a weekly basis has made the “interpretation” jobs of economists like me much easier. Unfortunately, the news on consumer spending today is not good. In fact, it looks downright negative.