Wal-Mart's weak quarter points to economy's uneven rebound

(c) 2013, The Washington Post.

Sluggish sales at major retailers paint a grim picture of an uneven economic recovery that has low- and moderate-income households reluctant to buy anything beyond the bare necessities.

Three years out from the worst recession in generations, many Americans are still contending with unemployment or stagnant wages that limit their disposable income. This group has also been disproportionately squeezed by the restoration of the payroll tax and rising gas prices, economists say.

Against this backdrop, Wal-Mart, the world's largest retailer, lowered its profit outlook for the rest of the year after reporting weak second-quarter earnings Thursday.

The company blamed the payroll-tax increase and the lack of meaningful inflation in food prices for its 0.3 percent decline in same-store sales, a key earnings measure, in the United States. Wal-Mart still made a profit of $4.07 billion, 1.3 percent more than the same period a year ago.

Wal-Mart shoppers did buy home goods, apparel and produce, but Chief Financial Officer Charles Holley Jr. said in a conference call that there has been "a general reluctance of customers to spend on discretionary items right now."

The poorest-performing categories for Wal-Mart were those considered discretionary, such as electronics and toys. "The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have," Holley said.

That sobering assessment came the same day as department-store chain Kohl's reported a 4 percent drop in spring profit and one day after Macy's lowered its annual guidance after disappointing sales.

"This has been a tough recovery for folks who are their prime customer base," said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a liberal think tank. "If you look at statistics on whose paychecks are going up, you'll see that it's clearly an uneven recovery. In that sense, lower-end retailers are going to have a tougher time."

Average weekly earnings for full-time wage and salary workers rose barely half a percentage point in the second quarter, according to the Bureau of Labor Statistics. Data released Thursday by the bureau show that weekly earnings tumbled 0.5 percent from June to July.

"Too many companies are following Wal-Mart's example by failing to invest in their employees, underpaying and under-staffing. As a result, we're seeing slow wage growth in the economy as a whole," said Amy Traub, a senior policy analyst at Demos, a public policy group.

Wage stagnation, she added, is a tremendous hinderance to a robust recovery. Bigger paychecks are needed to spur consumer spending, which accounts for 70 percent of the economy. Economists say lower-income families have a higher propensity to spend rather than save extra cash, which makes them a critical factor in consumer spending.

Even as jobless claims have dropped to a six-year low, many lower- and middle-income Americans have little wiggle room in their budgets. Gas prices are eating away at disposable income, with the average price for a gallon of unleaded gasoline in June and July higher than a year ago, according to the auto club AAA.

And while all Americans saw a reduction in their paycheck because of the two-percentage-point hike in Social Security taxes, those on the lower end of the earnings scale are feeling more of a pinch, Bernstein said.

"Even though the percent is same, losing money means more to you when you're in the $25,000 range than when you're in the $150,000 range," he said. "For families who are scraping by, the loss is simply more painful."

Conversely, upper-income families who are benefitting from gains in home values and the stock market are fueling strong sales for luxury retailers.

Macy's tony offspring Bloomingdale's, where sales climbed in the spring, was one of the few bright spots for the parent company. Yet results were mixed at Nordstrom, which is considered a barometer for luxury spending. While the company reported Thursday a 6 percent increase in overall revenue to $3.2 billion, sales at its high-end department stores slipped 0.7 percent.

"High-end luxury is doing a little better because of the wealth effect," said Jack Kleinhenz, chief economist for the National Retail Federation, a trade group. Still, "we are expecting a modest year."

In spite of the bifurcation in consumer spending, the retail sector has posted sales gains for 13 consecutive months through July, according to the NRF. The latest numbers from the Commerce Department show that Americans increased their spending in June by $59.4 billion, or about 0.5 percent, the fastest pace in four months.

Consumer borrowing, excluding mortgages, also surged ahead by $13.8 billion, to $2.8 trillion, in June, according to the Federal Reserve. Most of that borrowing was tied to auto sales, which have steadily grown throughout the year. Lenders have loosened once-tight credit standards, giving Americans with limited or poor credit histories, who tend to have lower incomes, a better shot at buying a car.

Economists point to two factors that are encouraging families with limited means to make big-ticket purchases.

For one, people delayed replacing their aging vehicles during the recession but have reversed course as the economy improves. Americans have also been paying down debt, which has put them in a better position to take advantage of low interest rates and other favorable borrowing terms.

"Consumers are feeling better about the overall economy but still pretty insecure about their own situation," Bernstein said.

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