Consumer Dies Another Death

Reports of the demise of retail demand make the rounds again.
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After a solid holiday season, talk of an impending slowdown in consumer spending all but vanished. But now, some four months later, concerns about the "spent-up" consumer are back, like the evil Chucky doll from

Child's Play

.

A smattering of disappointing economic data from March has Wall Street dialing back its forecasts for economic growth this year and traders dumping the major stock indices back to their pre-election levels. Chief among the reports was a weaker-than-expected retail sales report, followed by drops in the various measures of consumer attitudes.

Suddenly, the chattering masses aren't debating whether or not there will be a shopping slowdown. Instead, they question how severe the slowdown will be.

"There is no doubt that real personal spending in March is going to be fairly weak," wrote Sheryl King, senior economist with Merrill Lynch in a recent research note. "Moreover, the weakness in March puts the statistical momentum in core retail sales at zero, implying that second-quarter consumer spending will be weak as well."

Last week, King lowered her forecasts for U.S. GDP growth to 3.5% in the first quarter, from 4.3%, and to 3.2% in the second quarter from 3.5%.

"Unless we see a significant let up in energy prices, we see little scope for GDP to reaccelerate in the second half of the year," she said.

The

Federal Reserve

has pointed out that high energy prices have yet to filter into core inflation data. But some market watchers say there are signs that the added costs to consumers are starting to factor more prominently into their shopping habits.

Reports of collapsing auto sales at

Ford

(F) - Get Report

and

General Motors

(GM) - Get Report

indicate that buyers are increasingly rejecting the gas-guzzling SUVs and pickup trucks that made up the bulk of their revenue in recent years. Customers are supposedly turning to the fuel-efficient cars made by

Toyota

(TM) - Get Report

and

Nissan

(NSANY)

.

In general, people are reining in spending under the weight of higher prices, heavy debt and rising interest rates, along with slow wage growth in a job market that remains uneven.

"Gasoline is $3 a gallon in California, one of the biggest economies in the country, and that's having a big impact -- there's just no way around it," said Barry Ritholtz, chief market strategist with Maxim Group and a contributor to

TheStreet.com's

subscription sister site,

RealMoney.com

. "Clearly, consumers can't keep spending at the rates they have been. Their spending patterns were expanding faster than their personal income, which means many people have been taking on more debt. At some point, that can't continue."

The boom in mortgage refinancings that was credited with keeping consumers spending throughout the postrecession period has trailed off. Meanwhile, there are signs that shoppers have shifted their reliance to credit cards. Several major financial institutions reported solid first-quarter earnings recently, thanks in part to an increase in credit card receivables.

Bank of America

(BAC) - Get Report

said it opened 1.3 million new consumer credit card accounts in the quarter, as average managed outstandings for consumer credit cards exceeded $58 billion.

Citigroup

(C) - Get Report

said credit card receivables increased 3%.

"The consumer has really been using a lot of debt to fund this growth spurt we've been seeing in 2003 and 2004," said Paul Mendelsohn, chief market strategist with Wyndham Financial Services. "Now, this plunge in the stock market, high gas prices and high debt burdens are all converging on each other. The question is whether we can sustain this long enough to get some organic growth in wages and employment to help people get out of this."

In March, the government's monthly jobs report came in below expectations, with the economy adding 110,000 nonfarm payrolls rather than the forecast 220,000. Meanwhile, the government said retail sales rose by just 0.3%, slower than Wall Street's estimate of 0.8%, Excluding autos, sales picked up by only 0.1%, missing the expected 0.5% gain.

Consumer confidence also fell during March for the second straight month, according to the Conference Board, with its index slipping to 102.4 from 104.4. In a preliminary report on the month of April, the University of Michigan said its consumer sentiment index declined more than expected to 88.7 from the 92.6 recorded in March.

On an individual basis, retailers posted a choppy month in March, and there already are signs that April could be a disappointment. The world's largest retailer,

Wal-Mart

(WMT) - Get Report

, said its same-store sales, a key metric that gauges sales growth at stores open at least a year, rose 4.3%, meeting expectations. However, it said its April same-store sales likely will be flat to up just 2%.

Wal-Mart's chief competitor,

Target

(TGT) - Get Report

, beat Wall Street's expectations in March, with an 8.2% increase in same-store sales, but said its April sales would be down near the low end of its forecast range of 2% to 4%.

All the disappointing news has the market on its heels. Shares of Wal-Mart have been dropping for three straight months, losing 12% of their value since mid-January and creating a horrendous technical picture for the stock. Meanwhile, the

Retail HOLDRs Trust

(RTH) - Get Report

also has deteriorated, shedding 5% since the beginning of March. While the action reflects little confidence in the future, the entire stock market has suffered from comparable declines lately. For some investors, the selling smells like panic, and the economic data, which looked far better in February, could swing back to the positive in another month.

Drew Matus, a senior economist with Lehman Brothers, lowered his own estimates for GDP growth for the rest of the year last week, but he said it's too early to write off the U.S. consumer.

"Economists have forecasted the end of the U.S. consumer about 10 times so far in this cycle, and it still hasn't happened," Matus said. "The concerns are well-founded. Consumer debt levels as a percentage of income have been going up, but as a percentage of wealth, they have not been going up. So, it's not totally clear that things can't continue like this for a while."

Matus said the balance sheet of U.S. consumers now is essentially a race between rising home equity wealth and wage growth on the positive side and energy prices, debt levels and interest rates on the negative side. At this point, he sees no clear winner.

"It's just too early to call it," he said. "Saying that one side or the other is going to win is like calling a marathon after the first 50 feet. Anyone who tells you the U.S. consumer has hit a wall here isn't being forthright."