Retail Sales Are Still Hampered by Credit Crunch

Retail sales rose slightly last month, but the trend is a lot less positive than the figures suggest. It's a case of things not being as scary as some analysts expected, but is that really a sign of improvement?

Sales at stores open a year or more climbed 0.6 percent, according to Thompson Reuters, Analysts polled by the news agency had expected a 1.1.decline. Retail Metrics, a Massachusetts firm that also compiles sales estimates, said sales were up 1.1 percent last month.

By both measures, the tiny increases marked the first time that sales have crept up since August, 2008. We've had one month of incremental positive news and everyone's cheering.

There are two reasons why these numbers are less than meet the eye. First, Labor Day came a week later this year than last year. That means back-to-school shopping, which is a major part of retail sales at this time of the year, were pushed forward from the normal August shopping season into September.

And the other factor is the year over year comparison. Last September, let us recall, was filled with terrifying financial news of Lehman Brothers failing and Merrill Lynch being sold over a weekend. Retail sales in September, 2008 were rotten, so the comparisons don't really amount to much.

Retail sales continued to suffer all of last autumn, leading up to a very slow Christmas shopping period. As a result, this year's sales are going to look better than they really are.

Discounters are doing better than department stores, no surprise there. Family Dollar said sales at its stores climbed 5 percent in September. Costco reported a 1 percent increase, but noted that sales of discretionary items such as clothing and jewelry were down. In other words, people were buying necessities like food at discounters, but none of the other stuff that they used to buy.

Then you have teenage clothing stores like Abercrombie & Fitch. One theory of retail is that parents will buy their children whatever they want, even in a downturn. But sales at Abercrombie were down 18 percent in September compared with the year earlier number. Analysts had been predicting a 21 percent decline, so an 18 percent drop is considered good news!

Similarly, sales at teen outfitter American Eagle were unchanged in September from 2008's lousy results, but that was enough to send its stock up 7 percent. Reason: Retail Metrics had predicted a 4.4 percent decline.

In my view, there are still some uncomfortably large barriers out there that are keeping sales low.

One is unemployment. The jobless rate hit a 28-year-high of 9.8 percent last month, and most people expect the number will hit 10 percent by the end of the year. On Thursday, the Labor department said the figure for initial jobless claims was still a hefty 521,000, although this was down 33,000 from the previous week's revised figure.

People who don't have a job, or are afraid of losing the jobs they still have, don't spend money on unnecessary purchases. That is why discount stores that sell groceries are doing so well.

Another factor is credit. Many consumers buy things such as washing machines and refrigerators on their charge cards. But the Federal Reserve reported this week that consumers cut their borrowing by $12 billion in August as they paid down credit card debt. This was a decline of 5.8 percent. And the July number was down $19 billion, or 9.1 percent, the biggest contraction since the numbers began being counted in 1943.

It's a hackneyed notion, but still valid: the consumer accounts for 70 percent of the U.S. economy. As long as unemployment remains high and credit remains tight, retail sales are going to be under pressure. Even If analyst predictions turn out to be wrong on the downside, that is not a sufficient reason to break out the champagne.