Retail Sales: Why They’re
Still a Big Sore Spot

George delves into recent sales readings and why the retail sector is still a major sore spot for the U.S. economy.Stocks surged on June 14 after the release of the May Retail Sales reading. The buying on the news would make you think it was a strong reading; but, in reality, the headline number fell 0.2% in May. Investors apparently were excited that it was not as bad as the negative 0.7% reading. Ex-auto, the reading was better than expected at 0.3%, versus the estimate of 0.2%.

Now, a closer look shows that both the headline and core reading were well below what was reported in April. The readings actually came up short on some of the estimates.

I’m not sure why investors would be giddy about a negative reading. Yes, it was better than the consensus, but it still indicated a decline in spending.

There are some bright spots in retailing, namely the luxury brands such as Tiffany & Co. (NYSE/TIF). I guess the rich are getting richer.

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Yet, overall, I continue to view retail as a cesspool for capital. That is my investment advice.

Need more proof? Retail sales in the U.S. are estimated to come in at $393.28 billion in May, down from $396.27 billion in March, according to The Financial Forecast Center. But here is the problem. Retail sales are predicted to slide to $362.79 billion by November 2011.

Then there is the critical durable goods orders report. Are consumers buying non-essential goods and services? These include electronics, appliances, furniture, autos, and other big-ticket items. Spending here generally means that consumers are confident in their situation.

The uncertainty was clearly reflected in the recent weak Durable Goods reading, which was a disappointment and in my view worrisome. Non-discretionary spending remains a problem. Durable goods orders were disappointing, with a decline of 3.6% in April, lower than the expected decline of 2.0% and down from a 4.4% increase in March. Excluding the transportation element, the negative 1.5% reading was well below the estimated 0.6% increase and down from the 2.5% jump in March.

In my view, the readings clearly indicate the continued reluctance on the part of consumers to spend on non-essential big-ticket items, which is bearish.

Overall, I’m disappointed with the Durable Goods results, which in my view continue to indicate weak demand for non-essential goods and services. Again, until we see sustained improvement in jobs and housing, there will likely continue to be problems arising,

Consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage, so that they don’t worry about losing jobs and missing payments. The jobs market remains sluggish, with unemployment edging higher at 9.1%. And, until we see improvements, I question how confident homebuyers will be.

At the end of the day, we need to see the willingness to spend without worrying about money. Only under this scenario will there be sustained spending.

Given the current problems, consumer spending will likely continue to be soft, which will impact the growth of GDP.

If you are buying retail, stick with the discounters, dollar stores, and big-box operations.