U.S. Retailers’ Dwindling Fortunes a Signal of Economic Slowdown Ahead?

By Michael Lombardi, MBA for Profit Confidential

When retailers in the U.S. economy warn about their sales being in a slump or start to forecast rough roads ahead, it should be a warning to investors of an economic slowdown ahead. The logic behind this is very simple: Retailers in the U.S. economy show trends about consumer spending; if retailers are worried, it means consumer spending is in trouble.

One way to get an idea about bleak consumer spending is by looking at what happens during the peak buying seasons. In the most recent peak buying season, being the back-to-school shopping season, retailers in the U.S. economy were only able to lure in customers by slashing their already low prices.

The president of Retail Metrics (a company that provides estimates of same-store sales), Ken Perkin, said, “They [discounts] seem to be above the norm. That was emblematic of just the lack of demand for back-to-school.” (Source: “U.S. retailers rely on deep discounts to win back-to-school shoppers,” Reuters, September 5, 2013.)

In the very recent past, we have heard from retailers like Wal-Mart Stores, Inc. (NYSE/WMT) and Macy’s, Inc (NYSE/M) about how they are struggling with their sales. And that’s a problem when you have both low-end and higher-end retailers facing similar customer demand issues.

The Cato Corporation (NYSE/CATO) is an apparel and accessory chain founded in 1946. The company reported its same-store sales in August were down two percent compared to the same period a year ago. The CEO of the company, John Cato, said, “August same-store sales were within our range of expectations and consistent with our current trend. We remain cautious in regard to the remainder of the year.” (Source: “Cato Reports August Same-Store Sales Down 2%,” The Cato Corporation web site, September 5, 2013.)

While retailers face soft—and in some cases, declining—demand in consumer spending, I have another concern that doesn’t get much mainstream attention: how the pullback in consumer spending will impact the American jobs market.

Since the beginning of the so-called recovery, we have seen a spur in retail jobs. If we start to see retailers post poor sales because consumer spending is in a slump, jobs created in the low-paying sector will diminish as quickly as they were created.

It’s very simple: we can’t have economic growth in the U.S. economy until the average American Joe starts to spend. When he spends, it creates jobs and it keeps the economic cycle rolling. As I have mentioned many times in these pages, consumer spending makes up more than two-thirds of the U.S. gross domestic product (GDP)—that’s why it’s so important that consumers spend.

Retail stocks are a leading economic indicator. When I look at the retailers today, I see a declining trend in their prices. One of my favorite leading indicator retail stocks to watch is The Gap, Inc. (NYSE/GPS). Its stock price is down roughly 13% off its August highs—not good news at all for this sector.