Mortgage meltdowns, flooded Midwest malls, rising petrol prices, again – it’s easy to feel pessimistic about US retailers. But investors ought not to write the sector off altogether.
There are obvious risks. Following a surge in late 2006 – as falling energy prices eased pressure on consumers – the sector has had a choppy but ultimately poor run so far this year. Now fears for consumers’ financial health are taking hold again following weak first quarter economic growth data and amid fears of subprime contagion. This week’s gloomy forecasts from Sears Holdings and Home Depot deepened the growing despair. But all is not lost. June’s sales growth data for the biggest retailers, released on Thursday, turned out a shade better than expected, particularly for a sluggish month perched between Memorial Day and the back-to-school shopathon.
Seasonal factors aside, though, the central issue remains the health of the US consumer. Here, the potential effect of the unfolding subprime saga is a big unknown holding back investors. Yet, as Citigroup points out, net real estate value accounts for less than a quarter of American households’ net worth. Moreover, there is no such thing as an average US consumer, with the top fifth of US earners doing 40 per cent of the shopping (the bottom fifth accounts for 8 per cent of consumer spending).
If the headwind from the property market is perhaps less devastating than commonly held, the tailwind from employment remains strong. Hiring has held up, in spite of the downturn in construction. Salaries are rising at about 6 per cent on an annualised basis, according to Barclays Capital. There is an outside chance that such data will push the Federal Reserve to crimp shoppers’ spending power further with higher interest rates. But current conditions mean disposable income should continue to find its way into retailers’ tills in the second half.