Retail sales take a skid

Gasoline prices, wage lag, rate worries are reasons

A frugal June for shoppers

Analysts are differing on significance of drop

July 15, 2004|By Andrea K. Walker and Tamara El-Khoury | Andrea K. Walker and Tamara El-Khoury,SUN STAFF

The American consumer, who had shopped steadily through a sluggish job market, terror warnings, major storms and a historic blackout, suddenly became frugal last month, sending retail sales to their largest decline in 16 months.

Whether the drop was a blip or an indicator that four years of expanding credit and free spending were coming to a close, analysts' conclusions were mixed.

Gas prices, slow growth in wages and credit-card interest fears may have begun to take a toll on shoppers' psyches, and their wallets, some retail experts and consumers said. Also, while the economy added a net 112,000 jobs last month, it was less than half the number economists had expected.

"At some point, the closets get filled," said Eugene Fram, a marketing professor at the Rochester Institute of Technology. "You just can't keep momentum growing all the time."

Retailers also can't expect a summer boost from consumers cashing in checks from Uncle Sam - as they have the past two summers after President Bush initiated tax cuts to help revive the economy.

"Wages, job growth and income have not exceeded inflation," said Richard Hastings, vice president and retail analyst at Bernard Sands in New York. "People are spending too much and they're starting to realize their wealth is not keeping up."

Record gasoline prices, which peaked at $2.05 for regular in Maryland last month, meant that some consumers were using disposable income to fill their tank instead of buying that new pair of sandals. To many consumers, the gas increases were, in effect, an unexpected tax.

As Mark Jones took a lunch break from his printing job in Owings Mills yesterday, he said he has done less impulse buying since gas prices spiked.

"I consolidate trips. I find myself planning well ahead of what I have to do that day so I don't waste gas," he said. "Everything I do is more conservative."

Gas prices are most likely to affect spending habits of low- to middle-income shoppers, analysts said. Wal-Mart Corp., for example, a mainstay for low- and middle-income shoppers, reported a 2.2 percent increase in sales, which was less than the 3.6-percent increase it had anticipated. The world's largest retailer blamed energy woes.

"Wal-Mart is especially vulnerable to that, in the semi-rural counties where they reign supreme," Hastings said. "We're not talking about a Fifth Avenue location here. This is out in the boondocks. Those are places where people have to travel a lot more miles and wages are not high, and there's more of an impact from higher gas prices."

The threat of higher interest rates is also creating a rush among consumers to buy homes and other big ticket items while the rates are still low. Houses come with extra costs that may dip into consumers' discretionary spending, analysts said.

Shinell James of Park Heights agreed. "I just bought a house, so that took all my money," she said yesterday.

Concerns about interest rates may also just be making people more cautious, analysts said. The Federal Reserve last month raised a key short-term interest rate a quarter of a percentage point to 1.25 percent. It was the first increase in four years. While the higher rate won't immediately affect the plastic in people's wallets, higher rates will affect balances and new credit-cars offers in the future. Some banks increased their loan rates immediately after the Fed's move.

"It's a red flag to people. They read about it. It makes headlines," Fram said. "They're saying, `I'll have to finance that new couch over the next six months and I'll have to pay more for it than I do now; let's wait.'"

Cooler weather may have also dampened sales of appliances, such as air conditioners, and summer apparel. But much of June's decline came in automobile sales, which fell 4.3 percent.

Auto manufacturers are responding by reviving interest-free deals. June's sales figures reflect a significant change from the first months of the year, when sales were strong. The last time retail sales dropped as much as they did last month was in February 2003, when sales also fell by 1.1 percent.

But retail executives aren't sounding the alarm yet. The National Retail Federation, an industry trade group, said it still expects a 6 percent increase in retail sales for the entire year.

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