The biggest U.S. retailers will publish a spate of third quarter earnings report this week against a backdrop of slowing consumer spending and looming tariff increases that could mark a difficult holiday ahead for one of the most important components of domestic growth.
Big box retailers such as Target Corp. (TGT) - Get Target Corporation Report , Home Depot (HD) - Get Home Depot, Inc. (HD) Report and Lowe's (LOW) - Get Lowe's Companies, Inc. (LOW) Report will release quarterly profit updates this week, alongside traditional department store chains such as Kohl's (KSS) - Get Kohl's Corporation (KSS) Report , Nordstrom (JWN) - Get Nordstrom, Inc. (JWN) Report , Macy's (M) - Get Macy's Inc Report , Gap (GPS) - Get Gap, Inc. (GPS) Report and Footlocker (FL) - Get Foot Locker, Inc. Report , following a weaker-than-expected reading for U.S retail sales last month that has raised some questions over the health of the American consumer.
U.S. retail sales rose just 0.3% last month, but missed economists' forecasts when automobile sales were stripped out and declines in clothing, furniture, electronics, and building materials were computed. Previous readings for August and September were revised to the downside, which, when set against flat wage growth and looming tariffs on the next round of China-made consumer goods set to kick-in on December 15, could bode poorly for the coming Christmas period.
"The 'control' measure (of U.S. retail sales data) which drives the non-durable goods component of overall consumers' spending, is on course to rise at an annualized rate of less than 3% in the fourth quarter, following a solid 6.3% increase in the third," said Ian Shepherdson of Pantheon Macroeconomics.
"This does not guarantee a sluggish performance from aggregate real consumption, because
it tells us nothing about spending on discretionary services or vehicles," he added. "The latter was stronger than we expected in October, but the big picture is unfavorable as financing conditions tighten."
That said, both Walmart (WMT) - Get Walmart Inc. Report , the world's biggest retailer, and J.C. Penney (JCP) - Get J. C. Penney Company, Inc. Report , the struggling mall-focused retailer, posted stronger-than-expected third quarter earnings last week, taking shares in both groups notably higher as investors bet that, once again, U.S. consumer spending strength would continue to drive broader economic growth.
But U.S. households are staggering under a record $14 trillion in debts, when mortgages, credit cards and students loan commitments are factored in, and rising market interest rates are adding to the costs of keeping those obligations current.
The broader domestic job market might be hitting a wall, as well, as tariff uncertainty clips hiring plans and manufacturing firms postpone investments amid the steepest month-on-month decline in domestic industrial output in more than a decade.
CFRA Research sees U.S. holiday sales rising 4.3% from last year, to just over $1.05 trillion, but notes the ongoing trade war with China, as well an easy 2018 comparison linked to last year's government shutdown, masks underlying weakness heading into Black Friday.
The Atlanta Fed's GDPNow forecast, a real-time tracker of U.S. economic growth, suggests GDP will expand by a meager 0.3% this quarter as real personal consumption expenditures growth contracts by -2.3%.
"If we don't get substantial rollbacks on tariffs it is hard to see the sector receiving much of a lift given little sign of improvement in global demand while today's US retail sales number offer further evidence of a moderation in domestic consumer demand growth," said ING economist James Knightley.
The S&P 500 Retailing Index has largely kept pace with the S&P 500 this year, rising 22.13% against a 24.5% gain for the broader benchmark, helped by outsized gains from Target (71.3%) Walmart (27.6%) and Costco Wholesale (49%) (COST) - Get Costco Wholesale Corporation Report .