Is this as good as it gets for retail?
With the Consumer Confidence Index unexpectedly falling in July, breaking a three-month upswing, and now gas prices soaring again and interest rates expected to fly higher, there could be some pressure building that may tighten consumers’ purse strings.
Last Friday, crude oil prices leapt to a record $66 a barrel, which is nearly 50 percent higher than it was a year ago. Gasoline prices are already up 24 percent since the start of the third quarter, according to a SG Cowen economic report. Apparel spending is likely to be impacted.
“I heard on the radio the other day an interview with one fellow who commutes from Queens to the Bronx. His daily commute now costs $10 just for gasoline. He said that he has cut back on all peripheral spending. That affects apparel and entertainment spending because the price of gasoline is eating up his disposable dollars,” said Stanley Officina, president and chief executive officer of Ultimate Financial Solutions, a factoring and receivables management firm.
Officina also warns that rising home heating bills will cut into consumer spending, especially for home owners in regions such as the Midwest and Northeast.
“Last year I locked in at $1.499 a gallon for heating oil, which was fabulous. This year when I called a month-and-a-half ago, I was quoted $2.299 a gallon. If I call now for a quote its probably more like $2.499 or $2.599 a gallon. That will have a very serious impact on spendables. If it’s a tough winter, and a typical home owner spends a couple of thousand for heating, it could easily mean a 50 percent to 100 percent increase in costs. Now we’re starting to talk about real money,” Officina said.
Jim Rice, a retail analyst at Susquehanna Financial Group, believes the impact will affect lower-income shoppers first before migrating to higher-income consumers. “I could easily see the impact work its way up to the more moderate and even upper-moderate retailers if gas prices climb higher. Once the winter months come, you’ll definitely see consumers in the Northeast and upper Midwest get impacted by heating costs,” he said.
Another force that could affect consumers’ disposable income is the continued rise in interest rates, and its impact on the real estate market.
Gary Wassner, president of Hilldun Corp., a factoring firm, said, “I think a lot will depend on the fear that seems centered in the real estate market. People are getting nervous about that, and there’s been too much talk in the news about a potential bubble. It will probably depend on what the Federal Reserve does with interest rates. If the rate goes up, everything will cost more and more.”
But it’s not only about consumers possibly facing higher monthly mortgage payments; businesses will have to pay more to service their debt if the Federal Reserve Bank continues to hike interest rates. According to Wassner, with so much individual wealth tied up in real estate, any downturns in that sector could easily worry the psyche of consumers and their propensity to spend. If consumers slow down their purchases, retailers could start to see reduced cash flow during the important back-to-school and Christmas holiday selling seasons.
July’s surprising decline in consumer confidence was due to job worries and rising fuel prices. August’s report isn’t yet available, but economists and analysts are keeping a close eye for any indications that it will fall again. July’s Consumer Confidence Index fell to 103.2 from 106.2 in June. Both the Present Situation and the Expectations Indices dropped, as well, with the former falling to 118.5 from 120.8, and the latter declining to a reading of 93 from 96.4 in June.
The decline caught several economists off guard. Merrill Lynch economist David Rosenberg wrote in a preview note before the Conference Board posted the Index’s results on July 26 that the consensus was for the index to increase 0.5 points. Still, Lynn Franco, director of the board’s Consumer Research Center, said in a statement that July’s decline is “no cause for concern.” What could also be troublesome is Franco’s conclusion that, “while there is little to suggest a downturn in activity, there is also little to suggest a pickup.”
Jerry Sandak, executive vice president at Rosenthal & Rosenthal, a factoring firm, is not convinced consumers will continue to satisfy their need for material goods. “As [consumers] keep getting deeper and deeper in debt and the burden to support that [debt] increases as interest rates go up, I don’t look forward to a great second half. I see great instability. Because of the real estate boom, many people think they are millionaires, but they’re not really millionaires unless they sell their properties and have the cash in their pockets,” Sandak said.
Weekly Stock Index
|HIGH||LOW||RETAILERS||P/E||(00’S)||VOLUME LAST||AMOUNT CHANGE|
|74.1||27.42||Abercrombie & Fitch||26||80201||64.3||1.25|
|41.69||23.04||May Dept. Stores||27.9||73077||40.78||0.42|
|24.41||14.76||New York & Co.||45.4||2857||21.11||-0.16|
|8.5||1.95||United Retail Group||–||2727||8.12||-0.05|
|53.25||33.47||Polo Ralph Lauren||23.5||141236||52.18||2.46|
|18.25||1.1||True Religion Apparel||29.8||18850||15.4||-1|