Weak Retail Sales Show Economy is Still Near Bottom

Weak retail sales continue to bedevil the economy. About the only good news coming out of the retail sector is that sales were not as bad as everyone expected.

Retail sales in August fell by an average of 2.9 percent compared to a year ago. That was marginally better than the 3.8 percent decline analysts had predicted, according to a survey by Thomson Reuters. Sales had already declined 5 percent in July.

August sales, traditionally dominated by back-to-school shopping, were partially hurt this year because the Labor Day holiday occurred a week later than last year. But consumers are still very cautious with discretionary spending, which could hurt the overall economy as the consumer accounts for 70 percent of GDP in the country.

Stores that offer deep discounts fared the best in August, with the owner of TJ Maxx and Marshalls stores reporting that sales gained 5 percent. Sales declined 2.9 percent at Target, but that was better than analyst estimates of a 5.1 percent decline.

The worst hit retailers were teen fashion stores such as Abercrombie & Fitch, which was down 29 percent, and American Apparel, which declined by 20 percent. Teen fashion is crucial to the back-to-school period and the outlook for this year appears bleak. The same is true of high-end department stores such as Saks and Neiman Marcus, both down 19.6 percent. Back-to-school sales are generally a good predictor of the entire holiday season, so any decline there is worrisome after last year's awful holiday showing.

So what's the reason for these terrible numbers? The most obvious explanation is the still worrisome jobs outlook. Families cut back on spending when they are jobless or fear that they may lose their jobs.

More Americans than expected filed claims for jobless benefits in the week ending Aug. 29, according to Labor Department data. Applications fell by 4,000 to 570,000, which was above the 564,000 forecast by analysts surveyed by Bloomberg. And the number of people collecting long-term unemployment benefits rose by 92,000 to 6.23 million in the week ended Aug. 22. Why are jobless claims still so high? Companies are continuing to cut payrolls as a means of increasing profitability at a time when sales are stagnant.

Another, more paradoxical explanation may have been the success of the "cash for clunkers" subsidy plan for automobile sales. According to government figures, 700,000 cars worth $2.8 billion were sold under the plan. August's car sales were up 26.5 percent from July and up 1 percent from August, 2008.

How could a successful rebate program like cash for clunkers hurt retail sales? As Richard Feinberg of the Purdue Retail Institute explained, if the average monthly loan payment for a new car is $400, "then the amount of money not available for retail sales per month could be $300 million." He reckons that $1.5 billion may have been siphoned off from the entire period from back-top-school to the close of holiday shopping.

All of these retail numbers indicate that the economy is still close to the bottom, even if sales beat analysts' even more pessimistic forecasts. If the economy continues to improve, the numbers suggest discounters will perform the best. It could take another year before things return to normal on the retail front. Unfortunately, not every retailer will be able to survive that long.