Bleaker outlooks at retailers like Wal-Mart and Macy's are raising doubts that consumers will spend enough in coming months to lift the still-subpar U.S. economy.
Though the economy is growing steadily, Americans are being hampered by weak pay, higher taxes and tepid hiring. Sluggish overseas economies are also slowing sales for U.S. retailers. It's a picture the Federal Reserve will weigh in deciding whether to scale back its bond purchases as soon as next month.
"Consumers aren't going to start spending with abandon until we see much stronger job and wage growth," says Mark Vitner, an economist at Wells Fargo.
Average weekly paychecks have grown just 1.3 per cent since the recession ended more than four years ago. Over the past 12 months, pay has trailed even low inflation. That's partly why spending has remained lacklustre and why many Americans may be postponing purchases at department stores so they can buy cars, homes and other costly necessities.
Americans increased their spending at an annual rate of just 1.8 per cent in the April-June quarter — down from a 2.3 per cent rate in the January-March period. Consumer spending is expected to improve in the second half of the year. But most economists foresee only a slight acceleration to an annual rate of 2 per cent to 2.5 per cent.
Those spending rates are historically weak. And they're too meagre to significantly boost the economy, which grew at an annual rate of just 1.4 per cent in the first half of the year. Consumer spending fuels about 70 per cent of the U.S. economy.
For much of this year, many Americans have made major purchases they had postponed during the recession and the weak recovery. Auto and home sales have strengthened. Yet that's left less spending money for discretionary purchases such as electronic goods, clothes and eating out.
"Consumers are very much need-based," said Ken Perkins, president of RetailMetrics, a retail research firm. "If they're buying a new car, that leaves less money for a child's wardrobe."
Weak sales at Wal-Mart
The trend has weakened sales and profits at retailers like Macy's. On Wednesday, Macy's reported a disappointing profit for its second quarter and cut its outlook for the year.
And Wal-Mart, the world's biggest retailer, issued an earnings report Thursday that intensified worries about the strength of U.S. consumers, long a driving force for the global economy.
The Bentonville, Ark.-based discounter said it expects economic strains in the United States and abroad to squeeze its low-income shoppers the rest of the year. Wal-Mart is considered an economic bellwether: It accounts for nearly 10 per cent of nonautomotive retail spending in the United States.
The company attributed its gloomier report in part to a Social Security tax increase that's reduced most Americans' paychecks this year. Charles Holley, Wal-Mart's chief financial officer, said its customers appear reluctant to buy discretionary items like flat-screen TVs.
The state of the American consumer will be a key factor the Fed will consider in deciding whether to scale back its $85 billion US a month in Treasury and mortgage bond purchases. Those purchases have been intended to keep rates on mortgages and other long-term loans near record lows.