Wal-Mart Stores Inc. internal e-mails revealing the worst sales start to a month in at least seven years may be the first sign of a broader weakening in U.S. consumer spending as households grapple with the payroll-tax increase and delayed refunds.
The Wal-Mart sales have led some analysts to ask whether it was premature to conclude, based on January U.S. retail sales figures and demand for automobiles, that the two percentage-point increase in the payroll tax that took place at the start of the year had less impact on spending than predicted. Combined with a delay in tax refunds and rising gasoline prices, the cut in take-home pay may mean the world’s largest retailer won’t be the only one suffering.
“You have three extremely significant headwinds facing the consumer, so from that perspective, the comment by Wal-Mart seems rather appropriate,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. Porcelli is the top-ranked forecaster for consumer spending for the two years through December, according to data compiled by Bloomberg. Wal-Mart’s size and influence mean that “when they make comments like that, you should perk up,” he said.
This month’s figures are “a total disaster,” Jerry Murray, Wal-Mart’s vice president of finance and logistics, said in a Feb. 12 e-mail to other executives, Bloomberg first reported in a Feb. 15 story. Company officials expected a strong start to February because of the Super Bowl and milder weather, according to the minutes of a Feb. 1 officers meeting obtained by Bloomberg.
The Bentonville, Arkansas-based chain, which has more than 4,500 stores and clubs and 1.4 million employees in the U.S., doesn’t release monthly sales figures, only quarterly data.
When a payroll-tax break expired Dec. 31, Americans began paying two percentage points more in Social Security taxes on their first $113,700 in wages. For a person making $40,000 a year, that is about $15 a week.
Total retail sales in the U.S. rose 0.1 percent in January, a third consecutive advance, showing household spending held up even as the increase in the payroll tax takes a bigger bite from paychecks.
Department stores and online merchants were among those showing growing demand as improving job prospects and a strengthening housing market helped companies such as Gap Inc. and Target Corp. Economists at Macroeconomic Advisers LLC in St. Louis boosted their tracking estimate of first-quarter household spending to 1.9 percent from a prior forecast of 1.4 percent after the report.
“Any signs of weak spending should wave a caution flag, because it’s going to take at least a few months to figure out the full impact of the tax hikes,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. McCarthy is the second-best forecaster of retail sales for two years through January, according to data compiled by Bloomberg.
Higher fuel costs are another hurdle facing consumers. The average price of a gallon of regular gasoline at the pump was $3.75 on Feb. 18, up from a one-year low of $3.22 on Dec. 19 and the highest since mid-October.
Higher payroll taxes, on top of rising prices at the pump, “go against our customers’ wallet,” Howard Levine, chief executive officer of Family Dollar Stores Inc., the second-largest U.S. dollar store chain, said on a Jan. 3 conference call. “Clearly, they do not have as much today for discretionary purchases that they did.”
Adding to consumer distress, the Internal Revenue Service did not begin accepting and processing 2012 returns until Jan. 30, later than its original Jan. 22 electronic filing start date, due to Congress’ last-minute Jan. 1 tax deal. That, combined with the IRS’s efforts to prevent fraud, may slow refunds.
About $19.7 billion more in tax refunds had been delivered to shoppers by this time last year, according to an analysis prepared by Wal-Mart’s Global Customer Insights & Analytics division that was attached to Murray’s e-mail on Feb. 12. The retailer expected returns to be delayed by three to four weeks because of the late release of tax forms and as a result of federally mandated tax-fraud scrutiny.
Joel Prakken, senior managing director at Macroeconomic Advisors and a former economist at the Federal Reserve Bank of New York, is among those urging caution in interpreting the Wal-Mart emails as a sign of impending doom.
“It’s extremely dangerous to make much in the way of inferences from one company’s internal emails,” said Prakken. “I’m resisting the sky-is-falling interpretation of these emails.”
Even so, gains in consumer spending will probably slow from the second quarter’s 2.2 percent increase at an annual rate because of the tax increase, said Prakken. “It’s not a disaster, it’s a deceleration.”
There is little evidence yet that the headwinds facing consumers are affecting demand for big-ticket items. Cars and light trucks sold at a 15.2 million annual rate in January compared with the prior month’s 15.3 million pace, according to data from Ward’s Automotive Group. Including November’s 15.5 million rate, auto sales over the past three months have been the strongest in five years.
The Standard & Poor’s Consumer Discretionary Index, which is a weighted measure of companies in industries that tend to be most sensitive to swings in the economy, including homebuilders, restaurant chains and automakers, rose 0.4 percent today to close at 405.3 in New York, a record high. Wal-Mart shares fell 0.8 percent.
Also, luxury retailers may fare better than discount chains, said Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts.
“Luxury might be doing well,” lifted by rising stock prices and property values, Christopher said. “The lower-end household incomes are going to pull back a little more significantly, and the upper-income brackets are not as impacted by all this.”
Analysts at Citigroup Inc. also point out that discount stores will probably prosper, rather be hurt, if the economy were taking a turn for the worse.
Lower-end retailers may benefit as customers struggling with the economy trade down, according to a Feb. 17 report by Citigroup Inc. analyst Deborah Weinswig in New York. “This should ultimately benefit retailers that cater to these customers,” such as Wal-Mart and dollar stores, she wrote.