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Let the good times roll

Stronger-than-expected retail sales in June had media outlets using words like “soar” and “surge” to describe the gains reported by retailers who disclose monthly results. While it is probably overstating things to characterize increases of 4.5% at Target, 6.7% at Macy’s and 4.8% as Walgreens as anything other than an “increase,” the hyperbole on the part of the media and analysts can be forgiven because everything is relative, and the numbers are fantastic compared with earlier this year.

The consumer spending climate hasn’t been great of late, and concerns about a double-digit recession were being voiced with increasingly regularity by economic pundits. Consequently, mid-single-digit figures do seem like they are surging or soaring, although it would be more appropriate to reserve those adjectives for when comps hit double digits.

Nevertheless, retailers should enjoy the better-than-expected performance while they can and bear in mind that the U.S. consumer isn’t fully out of the woods, and June spending benefitted from some favorable developments regarding key variables.

First, there was a noticeable pullback in gas prices during June, which meant the pain at the pump was less pronounced and therefore the chilling effect on retail sales that is seen as prices are ascending was diminished. Second, barring some extreme situations of flooding in sparsely populated areas, weather conditions in most parts of the country were ideal from a retail sales standpoint. And third, commodity inflation is causing retailers to pass through price increases, which shoppers are able to withstand, and that benefitted total sales even though unit volumes aren’t expanding.

Had any of these variables be less favorable, retailers wouldn’t be feeling quite as good this week. That just goes to show the tenuous nature of the nation’s economic recovery and the likelihood that it will be a bumpy road the remainder of the year since further declines in gas prices and optimal weather conditions can’t be relied on when formulating same-store sales forecasts. Job growth would be a different story. Any progress on that front during the remainder of the year would produce the type of rising tide of consumer spending that results in a meaningful retail sales growth on a more predictable basis. Throw in further moderation in gas prices and product inflation and then maybe later this year retailers could be looking at a situation where it would be appropriate to use words like “surge” and “soar” to characterize sales growth.

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