By  on September 24, 2009

Retail stocks slipped 1.1 percent Wednesday as the Federal Reserve continued to walk the fine line between highlighting economic improvement while warning of a difficult recovery ahead.

Stocks registered gains earlier in the day before giving back advances following a statement from the Fed’s open market committee, led by Ben Bernanke.

“Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit,” said the Fed. “Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.”

Retailers are on both sides of this equation, trying to sell to stressed-out and suddenly thrifty consumers who are worried about their jobs, while closing stores, trimming expenses and laying off workers themselves.

The target range for the federal funds interest rate was kept at 0 to 0.25 percent, and the Fed said the economy would continue to warrant low interest rates for “an extended period.” Low interest rates spur economic growth by making it cheaper to borrow money.

“They’re saying that the recession is over, but they expect the recovery to be weak so they’re going to remain pretty aggressive,” said Gus Faucher, director of macroeconomics at Moody’s, noting the Fed would gradually ratchet back some of the extraordinary support it has given the economy.

But even as the Fed looks to return to something closer to normal, expecting to wind down its program to buy up to $1.25 trillion in mortgage-backed securities by the end of the first quarter, the consumer is still far from comfortable. Unemployment stands at a 26-year high of 9.7 percent, and some estimate it could top 10 percent before coming down next year.

“I don’t expect to see much improvement in the retail environment, probably not until early summer of 2010,” said Faucher. “I think we’re going to see structural changes in the way households spend their money.”

Specifically, he said, people would relearn the art of saving. That could mean that consumer spending does not bounce back as strongly as it has from previous recessions.

Traditionally, retail stocks have been among the first to rise after a downturn, as stores in the past have seen an immediate benefit from the spending that goes along with an economic recovery. But if shoppers remain wary this time through, investors betting on a retail rise could find that the stock prices aren’t backed up by the performance at the stores. Retailers, however, have cut expenses dramatically and trimmed inventories and might manage to boost their profitability this holiday season even if sales continue to flounder.

The S&P Retail Index fell 4.27 points Wednesday to 380.65 as the Dow Jones Industrial Average slipped 0.8 percent, or 81.32 points, to 9,748.55 and the S&P 500 dipped 1 percent, or 10.79 points, to 1,060.87.

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