Are American shoppers spent? That’s what it felt like when some of the nation’s big retailers released their earnings last week. Macy's reported disappointing sales and slashed its guidance for the year; Kohl's saw a surprising drop in comparable sales and logged its first slide in net sales in six quarters; Nordstrom’s results were impacted by lower-than-expected sales; and J.C. Penney also reported sales that were lower than expected. All of these stocks got clobbered, falling to multi-year lows and as a result, the department-stores group slumped 16 percent on the week. Those results put investors on edge, ahead of the government’s release of monthly retail sales. But then something miraculous happened: the report was better than expected! Sales were up a seasonally adjusted 1.3 percent, the largest increase in over a year. Even removing auto and gas sales, the numbers were good enough to prompt a number of economists to raise their estimates for second quarter growth.
So why did the stock market tumble, despite the seemingly good news? Perhaps it had something to do with a generalized anxiety about the ability for consumers to continue to spend without more robust wage gains. Although Americans have been willing to shell out big bucks for what they see as necessities (cars and technology), they have been far more prudent elsewhere, seeking bargains at discount chains.
The behavior is likely the result of the double whammy of two booms and busts (dot-com and housing/financial crisis) over the past 15 years. The toll on middle income Americans (defined as those earning $42,000 to $126,000 in 2014 dollars, for a household of three) has been enormous. According to a Pew Research Center report issued last December, middle-income Americans have fallen further behind financially in the new century. Adjusted for inflation the median income for a household of three fell from almost $83,500 in 1999 to just under $76,000 in 2014. Pew followed up that report with a new analysis, which found that from 2000 to 2014 the share of adults living in middle-income households fell in 203 of the 229 U.S. metropolitan areas.
With incomes dropping, consumers may be discovering something that behavioral economists have been discussing for some time: experiences pay greater dividends than things. When digging into the details of the retails sales report, it is clear that digital shopping continues to show strength, growing 10.2 percent on the year. But consumers are increasingly shifting away from goods and more towards services and experiences, like going out to dinner, taking vacations and purchasing premium media services.
MARKETS: Indexes continue to trade in a range, as investors bounce between optimism about the general direction of US growth and concerns that the rest of the world will eventually drag down the world’s largest economy with it. The broad market, as measured by the S&P 500, just barely remains in positive territory for the year.
- DJIA: 17,535 down 1.2% on week, up 0.6% YTD
- S&P 500: 2046 down 0.5% on week, up 0.1% YTD
- NASDAQ: 4717 down 0.4% on week, down 5.8% YTD
- Russell 2000: 1102, down 1% on week, down 2.9% YTD
- 10-Year Treasury yield: 1.7% (from 1.78% a week ago)
- June Crude: $46.21
- June Gold: $1272.70
- AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.21 wk ago, $2.68 a year ago)
THE WEEK AHEAD:
8:30 Empire State Manufacturing Index
Home Depot, TJX
8:30 Housing Starts
9:15 Industrial Production
10:00 E-Commerce Retail Sales
Cisco, Target, Salesforce.com, Lowe’s
2:00 FOMC Minutes
8:30 Philly Fed Business Outlook Survey
8:30 Chicago Fed National Activity Index
10:00 Leading Indicators
Campbell Soup, Deere
10:00 Existing Home Sales
Photo by Flickr User drinksmachine