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Consumer Confidence Falls to 31-Year Low

The weakening economy took its toll on some sectors despite an overall uptick in the Commerce Department’s reading on July retail sales.

Two weeks of wild swings in the global markets and renewed fears about the banking sector have taken a toll on consumer confidence, which was already shaky and contributed to the decline in July department store sales.

This story first appeared in the August 15, 2011 issue of WWD.  Subscribe Today.

The midmonth update of the Thomson Reuters-University of Michigan Surveys of Consumers showed that consumer sentiment hit its lowest level since 1980, falling to 54.9 in early August from 63.7 in July — the index’s third-straight decline.

Investors and consumers alike have been closely watching the market’s repeated and nausea-inducing sell-offs and rebounds, which eased as the week came to a close. The S&P Retail Index rose 1.5 percent, or 7.19 points, to 490.55 Friday as the Dow Jones Industrial Average gained 1.1 percent, or 125.71 points, to 11,269.02. So far this month, retail stocks have lost 9 percent as the Dow fell 7.2 percent.

Chris G. Christopher Jr., senior principal economist at forecasting firm IHS Global Insight, said the stock market’s recent drop did not bode well for consumer confidence or spending.

“People who can save will save, and they will park their money in very safe places like treasuries and bank accounts,” Christopher said. “The swings in the equity markets are making consumers very nervous.”

Still, he said a significant drop in global oil prices in recent weeks could help alleviate consumers’ fears about the economy and that shoppers would still be out there spending.

Christopher noted IHS projected that inflation-adjusted personal spending would increase at an annual rate of 1.6 percent in the third quarter, “considerably higher than the second quarter’s 0.1 percent rise.”

Many apparel retailers have been feeling the pressure as the weakening economy took its toll on some sectors despite an overall uptick in the Commerce Department’s reading on July retail sales.

Sales at department stores in July fell 0.8 percent to $15.4 billion, while sales at general merchandise stores, which includes discounters and department stores, were flat at $52.5 billion.

Apparel and accessories stores managed to gain ground, registering a 0.5 percent boost in sales to $19 billion in July compared with June.

Compared with a year earlier, specialty store apparel and accessories sales gained 7.7 percent, department stores posted a 0.4 percent increase and general merchandise store sales were 3.7 percent higher.

In the overall economy, retail sales edged up 0.5 percent to $390.4 billion, alleviating some fears that the economy might be headed toward another recession.

Kevin Regan, senior managing director at FTI Consulting, said department stores are struggling due to several factors, including high unemployment, volatile gas prices and a general nervousness about whether the economy is heading toward a recession, which affects their target customers. He said stores such as Kohl’s, J.C. Penney and Dillard’s are “muddling through,” because moderate- to middle-income consumers are “playing with caution.”

Conversely, a weaker dollar is helping high-end retailers, such as Saks Inc. and Nordstrom Inc., which he said were performing well.

“Tourism is having a high impact on the luxury side,” Regan said. “With a weak dollar, you can come in here and you can spend.”

But Regan warned the second half would be more challenging than the first half for many merchants.

“The luxury side will not be hurt by rising prices but the middle-income-targeted retailers are going to have to deal with higher cotton prices and somehow sit there and convince people to shop with inflation being another factor,” he added.