Latest Retail Update

Retailers continued to benefit from strong back-to-school sales over the Labor Day weekend. Demand was boosted by supplements to cash flow including tax cuts and rebate checks and the cash from record mortgage refinancing a few months ago. Sales were also supported by heavy discounting in the industry, as retailers continued to work to reduce inventories to desired levels. However, the boosts to cash flow are beginning to wane, so sales growth is expected to slow as the month progresses.

The back-to-school season appears to have gone well, although it has been highly competitive. Retailers have been aggressively keeping prices low for some time to court shoppers. The retail sales deflator for GAFO stores (which sell department store-type merchandise, making them comparable to chain stores) has declined 3.9% or more from last year for five consecutive months through July. While making it more difficult for retailers to generate profits given rising labor costs, this confirms that real consumer spending growth remains strong.

Despite the positives, however, there remain significant obstacles that will make it increasingly difficult for chain stores to maintain recent sales gains. Since January, 595,000 jobs have been lost. While there have been some signs of stabilization, overall, labor market conditions remain weak, threatening household incomes and confidence. Wage growth is also slowing, as employers limit their pay raises and shift the composition of pay toward benefits. Consumers remain heavily indebted and have lower wealth than they did in 2000. Confidence remains low. There is a lack of compelling fashions, toys, or other goods that consumers simply feel they must have. In the face of little if any pent-up demand, these factors will limit sales growth.

While cash flow remains strong enough to generate healthy sales growth in the near term, profit gains will remain harder to attain, and longer-term sales growth remains dependent on renewed job creation.

Go here to read more.