- The Washington Times - Wednesday, August 15, 2001

Retail sales were flat in July for a second consecutive month as consumers remained cautious about spending despite the arrival of $7 billion of tax-rebate checks and a record, price-induced drop in gasoline sales.

Yesterday's lackluster sales report from the Census Bureau, though better than analysts had expected, mirrored spotty reports and forecasts from Wal-Mart and other major retailers, many of which foresee little pickup in coming months from the recent spending funk.

Economists say the unexpected downward revision of June's sales figures to flat from a 0.2 percent gain, when combined with other recent data revisions, means that economic growth fell to around zero in the spring quarter and the economy teetered on recession.

"We've recently turned more cautious on the consumer," said Debbie Johnson, economist with Deutsche Banc Alex. Brown, although many on Wall Street and elsewhere are hanging their hopes on a consumer-spending revival in the second half of the year inspired by tax and interest-rate cuts.

"So far, the profits recession has had surprisingly little adverse consequences for consumers," she said. But "we believe that increasing layoffs and plunging help-wanted advertisements are likely to offset any long-lasting stimulus from tax rebates."

Other analysts noted, however, that the Treasury Department by the end of last month had sent out only the first installment of rebate checks, which will total $38 billion by the end of September.

They said the impact of this big bonus for consumers will be more visible in future monthly sales reports.

Optimists point to a spurt of spending on discretionary items last month such as eating out, electronics and beauty aids as a sign that consumers are using their tax rebates to splurge a little and are taking advantage of a record 4.2 percent monthly drop in gas purchases to spend more on other items.

Rosalind Wells, chief economist of the National Retail Federation, said the dip in gas and auto sales translated into more spending at stores that sell clothing, furniture, electronics, appliances and general merchandise.

It could signal a turnaround for those hard-hit retailers, she said.

"This may be the beginning of a stronger sales pattern," she said. "We expect the tax-refund checks received over the next two months, as well as new fall merchandise and back-to-school shopping, to help accelerate the progress we've seen in July."

Ms. Wells noted that a strong 0.9 percent jump in clothing sales last month reflected summer sales of retailers trying to clear their shelves of inventories and make room for fall merchandise. Deep discounting has depressed the earnings of many stores.

J.C. Penney, a major department store chain, reported another quarter of losses yesterday. And even Wal-Mart, a leader among discount retailers that have gained market share because of renewed bargain hunting by consumers, reported the slowest growth in earnings in five years during the spring quarter.

The retailing giant kicked off an aggressive program last month to get consumers to cash and spend their tax rebates at Wal-Mart stores in a move picked up recently even by high-end retailers like Nordstrom.

Despite its solid performance and the prospect of more tax rebates, Wal-Mart raised worries on Wall Street yesterday with a warning that it expects sales growth to slow in the second half of the year.

Home Depot, a big home-improvement chain boosted by robust home sales in recent months, said it also remains wary about the remainder of the year despite a good performance in the last quarter.

"Two flat months in a row appear to confirm the pessimistic view that consumers are running out of gas," said David Orr, chief economist with First Union Bank.

But he said stagnant sales in June and July were mostly due to the falloff in gas and auto purchases.

Yesterday's report "will not solve the debate about whether consumers will keep the economy out of full-fledged recession," he said.

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