Federal Reserve chairman Ben Bernanke told House lawmakers Wednesday that the pace of the economic contraction might be slowing, but his optimism didn’t lift Wall Street’s spirits.

This story first appeared in the June 4, 2009 issue of WWD. Subscribe Today.

Much, he noted, depends on consumers, who are vulnerable to the labor market, declines in household wealth and limited access to credit.

“We continue to expect overall economic activity to bottom out, and then to turn up later this year,” said Bernanke, basing the forecast in part on a stabilization in consumer spending.

Investors will get a fresh look at consumer activity today, when many retailers report May comparable-store sales, and another on Friday, when the Labor Department weighs in on last month’s employment numbers.

The S&P Retail Index slumped 1.3 percent, or 4.57 points, to 339.10 Wednesday, as the Dow Jones Industrial Average retreated 0.8 percent, or 65.63 points, to 8,675.24. The retail index’s pullback was the first after three consecutive upward sessions that had lifted it 8.8 percent.

Retail decliners included Macy’s Inc., down 4 percent to $13.32; Sears Holdings Corp., 2.6 percent to $65.58; J.C. Penney Co. Inc., 2.5 percent to $30.09; Target Corp., 0.8 percent to $40.97, and Kohl’s Corp., 0.8 percent to $46.65. Wal-Mart Stores Inc., a Dow component that last month said it would discontinue reporting monthly sales, rose 1.9 percent to $50.88.

Shares of The Talbots Inc. also swam against the tide, rising 15.8 percent to $4.85 after Lazard Capital Markets analyst Todd Slater upgraded the stock to “buy” from “hold” and said the sale of the J. Jill unit “could occur sooner rather than later.”

Slater said this would be a transition year for the company as it streamlines its sourcing platform, increases its fashion quotient, upgrades its financial management and disposes of J. Jill.

Analysts expect the company to post first-quarter losses of 50 cents a share on Tuesday.

“While most of the heavy lifting is behind it, J. Jill still looms as a distraction, and product enhancements are masked by the macroenvironment,” Slater said.

A sale of J. Jill, which the company is actively working on, would eliminate $314 million in contractual obligations and a drag on earnings for Talbots, the analyst said. Talbots purchased J. Jill in early 2006 for about $517 million in cash and put it on the sales block in November.

Deals have been few and far between, but a report this week showed U.S. private equity firms have plenty of money on the sidelines. And they are continuing to drum up funds.

Private equity firms raised $45.74 billion in capital through April this year, but spent only $24.03 billion, according to a report from The Alliance of Merger & Acquisition Advisors and PitchBook Data Inc.

Private equity has a total kitty of $400 billion — or enough to buy all the outstanding shares and debts of Wal-Mart, Target, Kohl’s, Macy’s, Sears and J.C. Penney with more than $70 billion left over.

Just how attractive retail and fashion will be when this money comes into play remains to be seen, especially since the market is saturated with stores and consumer spending remains a question mark. Investors, already edgy about the Labor Department’s monthly jobs report due on Friday, were clearly disturbed by the ADP National Employment Report Wednesday estimating that a higher-than-expected 532,000 private sector jobs were lost during May.

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