What Recent Retail Results Say about the Health of the Overall Economy

Subscribers to my investment newsletter, PowerTrend Profits, know I have been rather concerned, generally speaking, about the health of the American consumer. We all know that job creation has been lackluster, with the kind of jobs created skewed toward lower-wage ones known for stagnant pay. More recently, prices at the pump have risen above year-ago levels, and we’ve seen food prices start to move higher, too. Last week at the Las Vegas MoneyShow, Kraft Foods (KRFT) officials confirmed that the company recently instituted a price increase for its meat products. Before too long, expect to feel the pain of higher coffee prices, as well.

What raised my eyebrows recently was the weaker-than-expected April retail sales figure. With the late Easter holiday coupled with the surrounding spring break holidays, I thought for sure April retail sales would see a bump relative to March. Excluding autos, April retail sales were flat with March. While one month does not make a trend, the lack of any Easter goosing and any sign of pent-up consumer demand following the severe winter weather caused many on Wall Street to question the snap back in growth in the current quarter, at least where the consumer is concerned.

The news did not get any better this week, given the dismal retail results from the likes of Dick’s Sporting Goods (DKS), Urban Outfitters (URBN), Target (TGT), American Eagle Outfitters (AEO) and the TJX Companies (TJX), which owns TJ Maxx, Marshalls and HomeGoods. Electronics and appliances retailer hhgregg (HGG) broke with issuing formal guidance and instead forecast same-store sales growth to be “between negative low single digits to flat, with the first half of the fiscal year below this expectation and the second half of the fiscal year above this expectation.”

As part of its earnings miss, Dick’s Sporting Goods reported there was no weakness in sports and apparel sales — good news for Nike (NKE) and Under Armour (UA) — but that was a different case in golf and hunting, which suggests some softness, if not sluggish sales, at companies like Callaway Golf (ELY), Smith & Wesson (SWHC) and their competitors. One thing to note on firearm sales — looking past Dick’s Sporting Goods’ rear-view mirror comments that likely reflect year-on-year declines in FBI firearm background checks — the data shows a solid rebound in March and April. Also, Smith & Wesson already reported its quarterly results ended in January, which means its results have already started to move past those year-on-year declines. That’s something I’ll be watching for my PowerTrend Profits subscribers.

Even though results from Home Depot (HD) and Lowe’s Companies (LOW) were not stellar for the quarter itself, commentary from officials of both companies pointed to a stronger May. While this situation hints of a potential pickup in housing and repair & remodel spending, there remain several issues plaguing the housing market that include job creation, wages, low inventories and high prices.

While I agree there are factors impacting demand (job creation, wages, rising costs and high student debt), the housing industry also suffers from a supply issue. Single-family housing inventories remain near historically low levels, while prices have climbed significantly during the last few years. Friday’s new home sales report will give us the latest snapshot on those inventory figures.

In my view, this will be corrected as homebuilders bring on more supply of more affordable housing. Make no mistake, I’m not expecting the housing market to return to 2007 levels. Household savings rates are below 4%, which is lower than in the 1930s, and continuing to fall. Student loan debt is exploding in size and delinquencies are rising. Put the two together and I see good growth in housing over the coming quarters; just don’t expect it to shoot the moon. That means choosing wisely when investing in the homebuilders and building product companies.

The Continuing Water Crisis with Debra Coy
Rising food prices are a pain point that we, as consumers, will feel acutely now and in the near future. This is especially true in regards to the price of beef, as dwindling cattle herds are decreasing the supply of beef as we head into the demand-heavy summer months.

Drought conditions are a major factor in this shrinking of the herds, and they also are having a ripple effect on commodity prices. These conditions have been an issue for quite some time, as this nearly year-old PowerTalk shows.

The fundamentals that water industry veteran Debra Coy and I discussed in last July’s PowerTalk are still intact, meaning improvements in U.S. water infrastructure are still a pressing need.

The interview covers a range of topics still valid and relevant today, including: the water industry and its many facets, the water crisis which loomed then and continues to be a threat today, water’s role not only in the home but in industrial and other manufacturing issues, and how water access affects economic development through influencing companies’ critical decisions.

Listen to my July 2013 one-on-one conversation with
water industry veteran Debra Coy

In case you missed it, I encourage you to read my article from last week about how highway and bridge infrastructure affects the economy. I also invite you to comment in the space provided below.

NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.