By  on August 30, 2011

Consumer confidence fell sharply on both sides of the Atlantic this month, making the already murky outlook for the second half that much more unreadable.

Sectors on the move, from luxury and men’s fashions to dollar stores, might continue to outperform, but for the rest of retail the best-case scenario appears to be a continuation of the first half’s relatively tepid growth.

“We’re in a sort of muddle-through mode,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics.

Moody’s started out the year looking for the economy to improve at a faster rate in the second half, a rebound that’s been deferred. “We’re basically hoping to survive the second half in the hopes that things strengthen next year,” Hoyt said.

So far, consumer sentiment readings that harken back to April 2009 — when the economy shed 660,000 jobs and the Dow Jones Industrial Average traded in the low 8,000s — appear to have had a limited impact on sales.

“It’s definitely cause for concern,” Hoyt said of weakening consumer confidence. “It’s something we’re watching very closely, but we don’t see any evidence of consumers packing it in in the way that the confidence numbers would suggest.”

On Tuesday, The Conference Board said the Consumer Confidence Index dropped to a better-than-two-year low of 44.5 for August from 59.2 in July as Washington wrangled over the debt ceiling. The Expectations Index declined to 51.9 from 74.9 in July, while the Present Situation Index fell to 33.3 from 35.7. The two subindexes are based on a survey and each make up half of the broader measure of consumer sentiment.

In the survey, those expecting business conditions to improve over the next six months fell to 11.8 percent from 17.9 percent, while those expecting conditions to worsen surged to 24.6 percent from 16.1 percent.

The European Commission’s Economic Sentiment Indicator fell to 97.3 in the European Union from 102.3 in July. Consumer sentiment worsened in the region as employment fears rose and retailers also showed waning confidence “owing to managers’ negative assessments of the present business situation and business expectations, and due to an increasing number of firms accessing their volume of stocks as too large.”

That shoppers are out there spending at all is a sign of either fortitude or that, after four years of recession, financial crises and general weakness, consumers have learned to budget through their fears.

“The consumer’s conditioned to living in what we called ‘the new normal’ and consumption is still a major part of the mores of society,” said Arnold Aronson, managing director of retail strategies at Kurt Salmon. “People have learned how to be able to afford a reasonable amount of wants and needs without feeling as threatened as they did by the initial recession. Now it’s more familiar to people. [They are] battle-scarred consumers who will work their way though this thing.”

Retailers, said Aronson, also have a few scars of their own and are better prepared to deal with downturns.

It’s still unclear just what the industry faces in the second half, although retailers have trimmed expenses and held back on inventories and are on high alert following this month’s market gyrations.

Stocks fell immediately Tuesday after the update on consumer confidence, but regained ground later in the day. The S&P Retail Index closed up 0.4 percent, or 1.99 points, to 513.10, as the Dow Jones Industrial Average rose 0.2 percent, or 20.70 points, to 11,559.95.

Shares of Dollar General Corp. gained 5.8 percent to $35.76 after the company reported that second-quarter profits rose 25 percent to $181 million, excluding losses related to the early repayment of debt. Sales rose 11.2 percent to $3.58 billion for the three months ended July 29.

But tellingly, the dollar store said sales gains in apparel and home lagged the chain’s overall growth as consumers cut back on discretionary spending.

“The bulk of the population is a little bit nervous, and they’re nervous because they’re not quite sure what’s going on and you can sort of appreciate that,” said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.

Ghadar noted the stock market shocks this month and debt concerns in Greece, Spain, Italy and elsewhere. “You don’t have to be a genius of international finance, you just read that kind of stuff and you get a little paranoid,” he said.

Retailers might be hit hardest by the muddled outlook.

“This is going to be the most challenging period,” Ghadar said. “The numbers are going to be mediocre, but the uncertainty is going to be a problem.”

Antony Karabus, a retail adviser with consultancy PwC, said retail’s market share war would continue into the holiday season.

“There are going to be winners and losers in every single segment,” Karabus said. “There’s not enough to go around for everyone to win.”

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