Apr 14, 2009
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Sales drop shows US consumers still hunkering down

Apr 14, 2009

By Nicole Maestri

NEW YORK (Reuters) - U.S. income tax refunds are arriving in the mail, but this year many cautious consumers are using the extra cash to pay down debt instead of splurging on a flat-screen television.

It is just one way consumers have adjusted their spending in the face of a prolonged recession and a possible reason behind the government's disappointing March retail sales report on Tuesday, said Britt Beemer, founder of America's Research Group, which polls consumers on spending behaviour.

Consumers "have taken it on the chin," he said. "They are in a slash-and-burn mentality. They're trying to do everything they can do to get their bills paid off."

That behaviour was a surprise to economists, who expected March retail sales to rise 0.3 percent, after advancing in both January and February. Instead, the Commerce Department said on Tuesday that total retail sales dropped 1.1 percent in March.

The S&P Retail Index .RLX fell 2.3 percent in late afternoon trading, while Wal-Mart Stores (WMT.N) fell about 1 percent, Best Buy (BBY.N) declined 6.5 percent and Macy's (M.N) fell 6.4 percent. The government report dimmed hopes that the recession was close to hitting bottom, and showed consumers are unswayed from their new frugal mind-set.

Analysts cautioned that March sales results should be looked at in combination with April to account for the shift in the Easter holiday to April this year from March last year.

"Still, pending April's release, March's estimates throw cold water on the notion that consumer spending has hit bottom," wrote Patrick Newport, U.S. economist for IHS Global Insight, in a note.


Marshal Cohen, chief industry analyst at The NPD Group, said he was encouraged that the sales figures for March were not worse, given the high level of unemployment.

"When I look at the numbers, I sit there and see the beginning signs of what I call stabilization, I'm not calling it recovery," he said.

Richard Hastings, consumer strategist with Global Hunter Securities, said there are signs of spending stabilizing and consumers are "selectively" purchasing seasonal merchandise, like lawn mowers. An uptick in sales of existing homes is spurring demand for building materials and garden equipment, he said.

Beemer expects to see consumers head to stores around holidays, such as Memorial Day or Independence Day, when they believe retailers will offer the best deals.

While consumers may be spending selectively, sales of big-ticket items took a nose dive in March. The Commerce Department said sales of electronic goods and appliances tumbled 5.9 percent, versus a 0.7 percent gain in February.

"Income tax refund checks historically drive 40 percent of big ticket purchases of $500 or more in the months of March, April and May," Beemer said.

But this year, consumers expecting a tax refund said they would put 85 percent -- up from 70 percent last year -- towards paying bills and paying down debt, Beemer said.

While Jennifer Lee, an economist with BMO Capital Markets, said tax refunds offered consumers some comfort, "massive job losses remained prominent in consumers' minds, steering incomes towards savings."

The U.S. economy lost 663,000 jobs last month, driving the unemployment rate to a 25-year high of 8.5 percent. Economists polled by Reuters expect the unemployment rate to rise to 9.8 percent a year from now.

With such bleak figures, most consumers are not eager to open their wallets. Bob Goldin, executive vice president at food industry consulting firm Technomic, said that he was not seeing evidence that consumers are starting to indulge by returning to restaurants or higher-priced foods.

"I can't say that we have any hard evidence that things have gotten better recently," Goldin said. "It's slow out there."

(Additional reporting by Emily Kaiser and Lucia Mutikani in Washington, Brad Dorfman in Chicago and Dhanya Skariachan in Bangalore; Editing by Gunna Dickson and Bernard Orr)

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