Coming Week: Shoppers Flop

Coming off the Dow's largest weekly drop in five years, investors are losing their faith in the U.S. economy's most reliable engine of growth -- consumer spending.

Last week's sluggish January sales reports from major retailers like Wal-Mart(WMT Quote) and Target(TGT Quote) combined with a slew of other disappointing economic data to further a trend toward the global economy's worst fear: U.S. consumers are losing their appetite to buy stuff they don't need.

Now, Wall Street awaits Tuesday's report from the Commerce Department that gauges retail sales for the month. Economists expect a flat number after the government reported a decline of 0.4% in December, but investors are starting to suspect that even that low bar can't be met.

"If retail sales comes in lower than expectations, that will really shock investors and lean more of us into the recession camp, which is the camp I'm starting to fall into," says Peter Dunay, chief market strategist with Leeb Capital Management. "We've seen weakness in employment recently. Financials are still struggling. If we start to lose the consumers, we've got big problems."

Last week, the Dow Jones Industrial Average dropped 4.4% for the week on those worries. The S&P 500 fell 4.6%, and the Nasdaq Composite slid 4.5% over the five sessions.

This came after the government reported the first monthly decline in the U.S. job market on record in over four years for January. Weekly initial jobless claims have spiked this year. In the fourth quarter, U.S. growth in GDP recently stalled to a near standstill at a pace of just 0.6%. The Institute of Supply Management reported that its index on nonmanufacturing activity dropped unexpectedly in December to 41.9% for the month, indicating a contraction.

On the consumer front, the holiday shopping season was largely a disappointment, and hopes that gift card redemptions in January would save the day have fizzled. Moreover, the Federal Reserve reported a sharp slowdown in consumer credit card borrowing in December, suggesting that credit issues are spreading beyond the mortgage debacle.

All this comes in the midst of the worst quarterly earnings performance by the S&P 500 in almost six years. Thomson Financial reported Friday that with 73% of the index's companies having already reported fourth-quarter results, the S&P was headed for a year-over-year earnings decline of 20.2% -- its largest quarterly decline since the first quarter of 2001.

At the beginning of the fourth quarter, Wall Street was expecting growth of 11.5%, Thomson says. By New Year's, expectations had been ratcheted back to a decline of 9.4%.

Most of the dropoff came from the financial industry, where giant institutions like Citigroup (C Quote) and Merrill Lynch (MER Quote) have so far borne the brunt of the fallout from a decline in the U.S. housing market and the resulting global credit crisis. So far, 57% of the financial companies in the S&P have missed Wall Street's earnings estimates. This week, UBS (UBS Quote) will report earnings on Thursday, while it faces criminal investigations from the Justice Department and the Securities and Exchange Commission into how it valued its mortgage-securities holdings.

"Not only are the banks missing estimates, but they're missing estimates by wide margins," says Thomson Financial analyst John Butters.

Meanwhile, most retailers have yet to report their results for the quarter. General Motors (GM Quote) is set to report on Tuesday, which should provide some insight into how the already-troubled U.S. auto industry is coping with a consumer spending pullback. Private equity-owned Chrysler has plans to make dramatic cuts to its product lineup and its dealership network, according to media reports.

Another Dow component, Coca-Cola (KO Quote), will report earnings on Wednesday.