Shoppers emerging with Best Buy sales signal revival

Companies from Saks Inc. to Best Buy Co. are growing more confident that the recent revival of consumer spending is more than just a blip.

New-York based Saks is moving from defense to offense, selectively rebuilding inventory and increasing investment as consumers come out of their shell, Stephen I. Sadove, chairman and chief executive officer of the luxury retailer, said in a March 24 e-mail. Same-store sales at Best Buy rose 7.4 percent in the U.S. during the fourth quarter, the Richfield, Minnesota-based electronic retailer said March 25.

The cause of the turnaround is a large reservoir of pent- up consumer demand, Michael Niemira, chief economist for the International Council of Shopping Centers in New York, said in an interview. The rise in spending is sustainable.

The key factor determining the pace of household spending will be the strength of the labor market, JPMorgan Chase & Co. economists said in a March 12 report to clients.

Employers added 190,000 workers to their payrolls in March, the most in three years, according to the median forecast of 62 economists surveyed by Bloomberg News. The unemployment rate is projected to remain unchanged at 9.7 percent. The Labor Department releases job statistics for March on April 2.

Income growth is also contributing to the optimism. Wages and salaries increased 0.8 percent from September 2009 to February 2010 after falling 5.1 percent between August 2008 and July 2009, based on Commerce Department data.

The increase in consumption has been driven by people still employed who put off purchases during the deepest recession since the 1930s and are now returning to the shops.

Everyone has been focused on the 10 percent unemployment rate, Steven Kernkraut, a portfolio manager at Durban Capital s Berman Capital Management in New York, said in a Bloomberg Television interview on March 4. But you have 90 percent of America that is employed and that 90 percent that is employed is feeling better about their lot in life. March retail sales will be spectacular, he forecast.

The Reuters/University of Michigan consumer sentiment index supports Kernkraut s optimism, rising to 73.6 in February and March from 57.3 in March 2009.

Even though everything is not rosy, consumers are looking ahead, said Rosalind Wells, chief economist of the National Retail Federation, a Washington-based trade group. Maybe they are a leading indicator.

Sales will increase between 3 percent and 3.5 percent when retailers report their results April 8, according to an estimate from the International Council of Shopping Centers.

Waiting for Improvements

Many consumers were simply waiting for improvements in their personal incomes and their balance sheets prior to resuming spending, Tiffany & Co. Chairman and Chief Executive Officer Michael Kowalski said on a March 22 conference call with analysts and investors.

The New York-based luxury jewelry retailer reported an 11 percent gain in sales at U.S. stores open at least a year for the quarter ended Jan. 31, rebounding from a 33 percent decline in the year-earlier period. Tiffany forecast per-share profit of $2.45 to $2.50 for the current year, above the average estimate of $2.42 by 21 analysts in a Bloomberg survey.

Some economists are skeptical that consumer spending will continue to improve. Government stimulus has offset much of the effect of high unemployment and that stimulus is fading, Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, wrote in a March 12 note to clients.

Stronger-than-expected spending data probably overstate the underlying strength of the U.S. consumer, he said. Despite the recent upside surprises, we still expect consumption growth of only 1 percent to 2 percent in real terms this year and next.

Twenty-eight percent of respondents to a Bloomberg National Poll this month said they plan to cut their spending further in the next couple of months. The poll of 1,002 adults was conducted March 19-22 by Des Moines, Iowa-based Selzer & Co and has a margin of error of plus or minus 3.1 percentage points.

A prolonged spending boom has little chance of happening, said David Schick, a retail equities analyst with Stifel Nicolaus & Co. in Baltimore, citing as headwinds consumer debt and fears about higher taxes.

Joseph Carson, an economist at AllianceBernstein in New York, argues that consumers will work off their debt burdens more quickly this time. In the past, financially stressed households slowed the growth of borrowing while their incomes rose, a process that took about three years on average, he said. Now they are reducing debt outright.

Household liabilities fell to $14 trillion in the fourth quarter of 2009 from a record $14.5 trillion in the third quarter of 2008, Fed figures show. Prior to the drop, liabilities had risen every year since 1951, when records began.

Some of the decline is being driven by defaults on mortgage loans and other debt obligations, said Alan Levenson, chief economist at T. Rowe Price Group Inc. in Baltimore.

Partly as a result, the percentage of income that households must devote to debt payments has declined, falling to 12.6 percent in the fourth quarter, the lowest since 2000, according to the Fed. That frees up more income for spending.

Sales at Darden Restaurants Inc. s Red Lobster, Olive Garden and LongHorn Steakhouse outlets opened at least one year rose 1.3 percent in the third quarter, the first gain in almost two years, the company reported March 23.

We re seeing the industry strengthen, Clarence Otis, chairman and chief executive officer of the Orlando-based company, said in a March 24 earnings call. We expect that to continue.