Economic Data Reignites Concerns

We received some economic data this morning that threw cold water on a market that appeared ready to surge in reaction to positive economic data overseas. First, the Commerce Department reported that July Advance Retail Sales declined 0.1% compared to the consensus estimate for an increase of 0.8%. Excluding autos, retail sales in July were down 0.6% compared to the consensus estimate of +0.1%. The decline reflected weakness in a number of categories, including Furniture, Electronics, Building Materials, Groceries and Sporting Goods. Moreover, sales at department stores posted their largest monthly decline for the year at -1.6%. The saving grace in this report was a 2.4% increase in Motor Vehicles & Parts, which came as a result of the “Cash-for-Clunkers” program.

On a more encouraging note, the market reacted positively to quarterly results from Walmart today. Walmart’s quarter, which included the month of July, came in better than expectations from an earnings perspective but fell shy of expectations from a sales perspective. Same-store sales at flagship Wal-Mart stores in the US fell 1.5% – below both management’s guidance of 0-3% and the consensus estimate of about +1%. The sales shortfall was more than offset by strong expense discipline and a sharp reduction in inventories. Management commented that the sales environment was “more difficult than we expected”, and that the company will accelerate its focus on reducing expenses. We received similar comments from Macy’s in its quarterly earnings release yesterday. Both companies will continue to rely on expense containment and sharp inventory reductions to counter an exceedingly difficult sales environment.

The second set of data we received was weekly jobless claims. First-time applications for jobless benefits rose to 558,000 for the week ended August 7 compared to the consensus estimate of 545,000. While the figure is down from the high of 674,000 for the week ended March 27, this level of claims is still consistent with job losses in the hundreds of thousands for the month. Meanwhile, a better-than-expected figure for continuing claims of 6.2 million may have somewhat offset the bad news for initial claims. However, many economists have suggested that the recent drop in continuing claims merely reflects the expiration of benefits and not any significant increase in hiring activity.

So what are we to make of this new data? From our perspective, the consumer remains hunkered down as a result of a weak labor market, the loss of a tremendous amount of wealth in the housing and stock markets, and a sharp reduction in credit availability. A 50%+ increase of the lows in the stock market will help, but the data (including today’s) suggest the headwinds continue.