Consumers Start to Hesitate

The latest stats to come fluttering out of Washington and retail think tanks suggest stores may be facing a soft summer season.

The Commerce Department last week reported that U.S. retail sales fell slightly below Wall Street's April target — a finding some believe supports an earlier prediction by the Federal Reserve that the economy is likely to slow.

April retail sales rose 0.5% — a figure that includes pricey gasoline purchases. Stripping out dollars spent at the pump, sales gained just 0.1%, lagging March's 0.6% gain.

Meanwhile, consultancy Retail Forward's Future Spending Index weakened going into May. The index — a monthly survey of 4,000 households — during the first four months of 2006 escalated in tandem with a run-up in retail sales, which registered their strongest growth rate in six years.

However, consumers' outlook downshifted a few weeks ago. The May index registered a value of 95.9, compared with a 107.5 reading in April. That was down slightly from a year ago May, “suggesting the growth pace also should be weaker than last year,” according to Retail Forward.

The worry runs across all demographics, the study found. Households with incomes below $22,500 are worried about job security and income growth; they're also grappling with higher interest rates, refinancing and debt.

Middle income households with incomes in the $22,500 to $75,000 bracket are even more pessimistic about jobs and the potential to boost earnings. Their debts, too, have become more of a burden.

Even households earning above $75,000 are worried about the job outlook and higher debt loads. They're also concerned about stock market performance.

Although big tax checks started rolling in this month, America's Research Group reported in its Furniture Buying Index for May that consumers are using their refunds to pay down debt, rather than invest in furniture. In a typical month, 80% of the 5,000 to 8,000 consumers the consultancy interviews can name a specific furniture item they intend to buy.

Finally, the National Retail Federation predicted this month that consumer spending will decline in the wake of the Fed's recent 0.25% interest rate hike. NRF expects the higher interest costs to impact purchasing intent “for months to come.”

All of this presages a quarter or two of inventories that ought to be on the lean side, as well as the potential for push-back on orders now in the pipeline. It also raises the question of how promotional retailers will go in an attempt to lure traffic.

“Needs” merchandise doesn't appear likely to suffer, but “wants” goods will have to be tantalizing indeed.