America's Economic Recovery at Risk as Consumers Start Pulling Back

By George Leong

The tax increases and lack of wage increases appear to be impacting America; for a country needing to see its gross domestic product (GDP) expand, this is not what you want to hear.

Of course, sluggish consumer spending and GDP growth may also force the Fed to refrain from cutting its bond stimulus too quickly.

In my previous commentary, I talked about the lack of revenue growth in corporate America.

We are now seeing soft reports and guidance from major retailers across the nation. Simply consumer spending has been impacted by the tax increases and the lack of jobs growth and wage increases across the country. The lack of consumer spending is even more startling given the low interest rates available for financing purchases. If you’re not worried, you should be.

Wal-Mart Stores, Inc. WM, the bellwether of retailing in the United States and the world, released a report and consumer spending assessment that was dismal. The discounter said its key comparable store sales in the U.S. contracted 0.3% for the 13 weeks to July 26. (Source: d’Innocenzio, A., “Wal-Mart cuts profit outlook on shopper worries,” Yahoo! Finance, August 15, 2013; http://finance.yahoo.com/news/wal-mart-cuts-profit-outlook-112129846.html.) Pundits have been expecting an increase in this key metric, so it’s a red flag. Of course, with Wal-Mart primarily catering to the lower income groups, the decline in sales indicate a tough time for consumers despite all of the riches made by the higher income earners in the stock market due to the Federal Reserve’s money printing strategy.

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And to make matters worse, Wal-Mart is also not confident moving ahead after cutting its earnings range for 2013 and predicting flat results for comparable store sales for the next 13 weeks. Sales for fiscal 2014 were cut to the range of two percent to three percent, significantly down from the prior five percent to six percent. This clearly indicates an issue with consumer spending.

However, the soft results from Wal-Mart were not isolated; Macy’s, Inc. M and Kohls Corporation KSS are also facing a tough retail climate, cutting their respective estimates for the year. The fact that Macy’s customer group consists of the middle class and higher-end shoppers indicates consumer spending is broad across the income brackets.

Macy’s was short in its fiscal second-quarter earnings, the first miss after beating in three straight quarters. The retailer’s comparable store sales fell 0.8% in the quarter. Macy’s also cut its sales and earnings outlook for fiscal 2014.

The results from Wal-Mart and Macy’s suggest all is not well with the consumer spending in the retail sector in the United States, from the lower income shoppers to the middle class.

At the higher-end, Coach, Inc. (NYSE/COH) also struggled with sales namely in its U.S. market, while China continued to be a strong growth area. The company’s comparable store sales fell 1.7% in North America for the fiscal fourth quarter, while China’s increased at double digits. When the upper echelons of the shoppers hold back, it cannot be a good sign for consumer spending.

My fear is that the reduction in consumer spending will impact GDP growth and the country’s economic recovery. Of course, this will allow the Fed to continue to print money.

This article America’s Economic Recovery at Risk as Consumers Start Pulling Back was originally published at Investment Contrarians