Sunday Times (London)
August 19, 2012
by Irwin Stelzer
America goes shopping again, exulted one commentator. "The American consumer is back, big time," chortled another. "Retail sales increase notably more than expected in July, reflecting across-the-board strength in sales," commented the more sober economists at Goldman Sachs. As with retail sales in Britain, the US figures surprised on the upside, the 0.8% increase, the first in four months, exceeding the consensus forecast of 0.3%. Throw in the nascent recovery in the housing sector and talk turned to just how Federal Reserve Board chairman Ben Bernanke and his monetary policy committee colleagues would react.
The consensus is that those who are hoping that Bernanke will use the gathering of central bankers in Jackson Hole, Wyoming, later this month to launch QE3 are likely to be disappointed.
There are several reasons to remember that it is risky to project from one data point. For one thing, retail sales figures are notably volatile: they dropped by 0.7% in June before the July rebound. For another, sales in the recently ended second quarter dropped by 0.6% compared with the first quarter, the largest rate of quarterly decline since May 2009. So, to borrow from George Gershwin's description of woman, the July retail sales figures may prove to be "a sometime thing". If so, and if the September jobs report is weak, Bernanke just might ease monetary policy further.
Perhaps the best way to see what the sales figures tell us about the American economy is to dig into the reports of leading retailers, starting with Walmart, the world's largest retailer by sales. Its revenues were up 4.5% on July 2011, helped by sales growth at its Asda stores in Britain. But chief executive Mike Duke warns that Walmart's primarily low-income customers continue to live from pay cheque to pay cheque, and in America are being hit by higher petrol prices, up almost 10% in July.
America's second-largest retailer, Target, also reports that its lower-income and somewhat-better-off customers are struggling. July revenues were up, mostly owing to sales of food, healthcare products and other non-discretionary items, but it took "Christmas in July" discounting and 5% paybacks on the company's credit card sales to boost volumes. Ominously, bad-debt expenses in the credit card division soared.
To add to the picture at the lower end of the income scale we can look to Sears and JC Penney. Sears is a special case, with chairman Eddie Lampert trying to reverse a slide that Columbia University professor Eric Abrahamson says has it staying alive by selling parts of itself, but "permanently failing" as a retailer.
Penney is wallowing in red ink as customers shun its every-day low price, "no bargain" policy and seem to be migrating to Macy's, which reports that its stores in malls also occupied by Penney are growing rapidly. Penney lured Ron Johnson, its new chief executive, from Apple, where he ran that company's spectacularly successful retail operations. His efforts to introduce some of Apple's sales techniques into Penney's operations have not paid off (he would add "yet"): sales fell almost 22% in July compared with last year, and sales per square foot came to a meagre $135, compared with $6,123 for Apple, according to analysts at Retail Sails.
That should be no surprise. I prowl malls when I travel on business and can't help noticing that Apple stores swarm with excited customers while copycat Microsoft outlets echo to the footsteps of the few who drop in. It takes more than copycat stores to generate sales.
Consumers' addiction to discounts is not confined to the lower end of the income spectrum. Gap's sales jumped 10% in July in part because of heavily promoted discounts. And Coach, the high-end handbag and leather goods retailer, with shops on New Bond and Regent streets in London, reports that it failed to grow significantly in America in the second quarter because it stopped offering discount coupons at some stores.
There is more retail news that tells us a great deal. Sales at Staples, the office supply chain, and Best Buy, the electronics retailer, are dwindling. The likely cause: competition from discounters such as Walmart and internet sellers such as Amazon, combined with an inability to come up with viable competitive responses. Amazon's sales were up 29% in the second quarter as it continued to sacrifice profits to woo customers from shops and malls, and to pour money into distribution centres that some day might provide same-day delivery.
Sales data also suggest that the days when retailers relied on free-spending teens are over. Abercrombie & Fitch, the trendy chain of choice for young customers, saw second-quarter earnings drop by more than 50% on very disappointing sales, especially in Europe, although the teenage unemployment rate on the continent is not significantly different from that in America, where almost one in four 16 to 19-year-olds cannot find work. No surprise that Abercrombie's experience parallels that of other chains catering to this age group, which is probably finding parents less enthusiastic about funding its lifestyle.
Higher-end retailers are doing better, although the reduced flow of well-heeled European tourists is a negative. And established speciality brands continue to grow. Perhaps in response to the impetus provided by runaway book sales of Fifty Shades of Grey, Limited's Victoria's Secret, which sells £4 billion of its, er, fetching lingerie a year, racked up a 12% increase in sales and has upset its tonier (snootier?) neighbours with plans for a shop on Bond Street.
There you have it. Retail sales don't tell us much about the outlook for the economy or more Fed easing: one swallow does not a summer make. The internet remains a source of Schumpeterian creative destruction, with Amazon hurting office suppliers and electronics retailers. Imitating Apple's retail success is not easy. High unemployment among youngsters is hitting their preferred retailers. Overseas sales by American companies are shrinking as Europe lurches into recession. Sex still sells.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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