The fact that consumer spending has not tanked in spite of unemployment being at over nine percent and expected to stay around this level through 2012, and continued weakness in housing is encouraging.

When consumers are cautious, they tend to hold back on any major purchases, such as homes, vehicles, furniture, appliances, and travel, to list a few. This will impact spending and gross domestic product (GDP) growth and the ability of companies to expand their businesses and hire. This is my concern, and I feel that continued nervousness among consumers will impact GDP.

Consumer Confidence in August was another disappointment, with a dismal reading of 44.5, the lowest reading since March 2009. The reading was well below the estimate of 52.0 and the revised 59.2 in July.

To give you an idea of how bad the readings are, economists feel that a reading of 90 indicates a healthy economy, something that has not happened 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. In my economic analysis, the situation is not good.

The impact of lower confidence has been felt in spending.

The headline Retail Sales reading for August showed no growth, below the consensus estimate of 0.2% and the downward revised 0.3% in July. Excluding the auto portion, Retail Sales increased a mere 0.1%, again short of the consensus estimate of 0.3% and the downward revised 0.3% in July.

At this juncture, I’m selective with retail stocks. My investment advice, my best stock advice, to you would be to stick with the leading discount bellwether retail stocks. We are also seeing buying in higher-end goods, such as Tiffany & Co. (NYSE/TIF).

In the large-cap area, the top stocks include Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).

On the smaller end, I’ve previously highlighted small-cap PriceSmart, Inc. (NASDAQ/PSMT), an operator of 28 warehouse clubs in 11 countries in Central America and the Caribbean. PSMT has been on a tear on the chart, advancing over 155% over the past 52-weeks versus a mere 7.51% for the S&P 500. The stock is now pricey. The profits have been made in the stock.

An interesting discounter is large-cap Dollar General Corporation (NYSE/DG), which operated a staggering 9,300 stores across 35 states. Dollar has reasonable valuation trading at 14.27X its FY13 earnings per share and a price/earnings to growth ratio of 0.97. Dollar General has above-average longer-term price appreciation potential for investors.

My favorites in the retail space continue to be the discounters and big-box stores. The big-box stores are now selling a broad range of electronics and are adding to their product line. This will offer consumers a one-stop place for shopping and make more money for these companies. Just take a look at the impact on Best Buy Co., Inc. (NYSE/BBY) from the discounters aggressively moving into the electronics area. Even supermarkets are selling TVs now. Best Buy may need to redefine itself.