A low unemployment rate and booming stock market would normally be a boon for U.S. retailers. But many instead are coming under growing pressure as Americans tighten their spending and look for bargains.
Continue Reading Below
Retail sales -- reflecting consumer spending at stores, restaurants and websites -- fell 0.3% in May, the biggest decline since January 2016, the government reported Wednesday.
While much of that reflected less spending on gasoline -- the average price for a gallon fell in May -- Americans cut spending broadly. Sales suffered at big-box stores, car dealerships, electronics retailers and restaurants.
The decline may have been a blip -- sales are still up 3.9% this year compared with the same period in 2016. But many economists are puzzled that consumers aren't shelling out more, given the stability in the labor market and solid household finances. Unemployment, at 4.3%, hit the lowest level since 2001 last month, the stock market has marched to record levels and surveys show high household confidence in the economy.
Shrinking profit margins and declining foot traffic have forced many retail chains to scale back. On Sunday, children's clothing seller Gymboree joined a growing list of retailers that have filed for bankruptcy this year. Since the beginning of the year, several department stores and specialty chains have announced plans to close hundreds of stores.
Last week, Ascena Retail Group Inc., which owns Ann Taylor, Loft and Lane Bryant, said it could close more than 600 stores by 2019, citing traffic declines and intense promotional activity. "We expect these factors will remain major headwinds for the foreseeable future and reflect an accelerated shift to consumer demand toward e-commerce," said Ascena CEO David Jaffe.
Continue Reading Below
The glut of stores and shift to online shopping have made consumers more closely attuned to pricing. Some companies such as J.Crew Group Inc. and Target Corp. have set forth plans to offer more competitive pricing. Amazon.com Inc. recently began offering food-stamp program users a $5.99 monthly Prime membership -- a move that could put further pressure on Wal-Mart Stores Inc. and other discount chains.
Last week, Macy's Inc. warned that gross margins for the current quarter and full year would be lower than expected due in part to heightened promotions -- sending shares of the department store chain to their lowest close in more than six years while dragging down other retailers as well.
To woo price-sensitive shoppers, Macy's plans to open more Backstage discount stores inside its traditional locations after observing shoppers visiting stores with Backstage spaces more often. "Our assumption is that traffic will continue to be challenged," said Macy's CEO Jeffrey Gennette, so "whatever we put into that box that gets additional trips" will help.
Retail sales are a big component of consumer spending, which in turn accounts for roughly two-thirds of U.S. economic output. Despite strong job growth, a booming stock market and surveys showing high household confidence, Americans aren't shelling out at the rate that many economists expected this year. The subdued spending is helping to keep the economy in the sluggish 2%-growth that has marked the nearly eight-year economic expansion.
A big factor behind last month's decline in overall retail sales is a slowdown at car dealerships. Car sales, after hitting a record in 2016, have fallen nearly 2% over the past three months. They are still up by a healthy margin from a year ago, and they remain at a high level historically. But the slowdown could mean that the economy will have to rely on other sectors for stronger growth ahead.
Economists said May's decline was likely a blip and that they expect consumers to step up spending in coming months. Retail sales have climbed 3.9% this year compared with the first five months of 2016.
"The fundamentals for consumers remain solid," Gus Faucher, PNC's chief economist, said in a note to clients. "More jobs, rising wages, low inflation, rising home sales, and low interest rates will continue to push consumer spending forward in 2017."
Not all retailers saw a decline last month. Nonstore retailers -- a group led by websites such as Amazon.com -- posted higher sales last month. Spending at those outlets has grown 11% over the past three months compared with the same period a year earlier. That partly reflects a major shift in consumer habits from brick and mortar stores to the internet.
Write to Josh Mitchell at email@example.com and Khadeeja Safdar at firstname.lastname@example.org
(END) Dow Jones Newswires
June 14, 2017 14:35 ET (18:35 GMT)