Shoppers' resilience is under scrutiny

Retail sales figures, due today, are a key indicator

June 01, 2006|By ANDREA K. WALKER AND TYEESHA DIXON | ANDREA K. WALKER AND TYEESHA DIXON,SUN REPORTERS

While perusing shirts at The Gap in the Inner Harbor yesterday, Jener Crisolo, a nurse, dismissed larger concerns about the economy. People need new "gear," especially in the summer, he reasoned.

"You have to buy something," he said. "I think others have slowed down because of the [economic] situation, but for me, I buy what I want," said Crisolo, 35, of Baltimore.

Today, Federal Reserve officials, who set interest rate policy, corporate planners who assemble billion-dollar budgets and other economists will be trying to glean whether in the near-term consumers like Crisolo represent the exception or the rule.

They're watching as several national retailers release sales results for last month. Always a key component of the nation's financial health and responsible for two-thirds of all economic activity, retail sales results may have heightened importance today.

Economists are trying to assess whether the recent cooling in the housing market and rising interest rates - also major economic drivers - have started to take a toll on consumer spending.

The American shopper has shown great resilience in recent years, buying through war, hurricanes, rising energy prices and inflated health care costs. But some economists have started to wonder whether consumers have reached a breaking point, and they are bracing for a possible slowdown.

"Many of us are looking for a tipping point," said Jared Bernstein, a senior economist with the Economic Policy Institute in Washington. "You've got serious head winds in this economy. You've got higher interest rates that are starting to bite. You've got a housing market that is slowing down. And you've got this big gorilla called energy prices."

The stock market plunged Tuesday after the world's largest retailer, Wal-Mart Stores Inc., reported that its sales growth for May would be at the low end of its expectations. Also this week, the Conference Board's measure of consumer confidence for May saw its steepest monthly drop since last year's Gulf Coast hurricanes.

"I think the numbers are going to be fairly soft," said Mark Vitner, a director and senior economist with Wachovia Corp. in Charlotte, N.C. "There's no doubt that consumer spending is losing momentum. The higher gas prices have been beating away at consumer purchasing power."

Gas prices haven't resulted in a slowdown in gas consumption, but analysts say gas prices have a gradual impact on discretionary income. Oil prices reached a record high of more than $75 a barrel in late April. Gasoline prices have risen as high as $3 a gallon in some areas.

Mixed reports on the state of the housing market may also be causing shoppers to rein in spending. Sales of previously owned single-family homes and condos dropped 2 percent in April, the latest figures available, according to the National Association of Realtors. Housing price gains have also slowed, the group said, and the number of unsold homes had reached a record 3.38 million units.

"The consumer hasn't been able to use their house as a piggy bank as they have in the past," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm in New York.

Still, some analysts said that a slowdown should be minimal and that there is no reason for widespread concern. In recent years, downturns in retail have proved temporary, and the rebounds have come quickly.

"We're expecting some slowing in consumer spending growth, but as long as the job market stays healthy and people's wages stay healthy, we don't see any reason for any kind of collapse in spending growth," said Scott Hoyt, director of consumer economics at Moody's Economy. com.

Some analysts said that Wal-Mart may not be the best gauge for overall consumer spending, because its shoppers tend to have lower incomes, and their discretionary funds are affected more quickly by factors such as higher gas prices. But even Tiffany & Co., the luxury goods and jewelry retailer, yesterday reported its U.S. sales down 1 percent at stores open at least a year. Double-digit international sales growth for Tiffany more than made up for the domestic slide.

Costco, which reported its sales a day earlier than most retailers, said yesterday that its May sales had jumped 10 percent, beating expectations.

"I think that consumer behavior is fluid," said Jeffrey P. Klinefelter, a retail analyst at Piper Jaffray & Co. "I think there are times when confidence rises and falls based on external factors like gas prices and home prices and negative sentiment that they pick up through the media and their own personal lives. Shopping is a fluid process. It strikes me as if national traffic levels have been consistent."

At the Inner Harbor yesterday, Meghan Shapiro, a 21-year-old student, said she is finding other ways to cut back to be able to shop. "I cut back on driving. I walk everywhere," she said as she strutted off with a J. Crew bag.

andrea.walker@baltsun.com

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