The current low interest rate environment has helped consumers refinance homes, replace old cars and take out new loans. But to the chagrin of retailers, it also has led people to curtail their spending on cheaper goods.
warned last week that their quarterly earnings would miss forecasts, while
said sales may be below projections for March. The reason, some say, is not so much the war but the fact that consumers are focusing on big-ticket items such as homes and cars, at the expense of retailers.
"The truth is that, while the economic conditions remain the same, consumers will continue to take advantage of the low rates, enabling automakers and the housing market to continue to steal away wallet share from most retailers," said Barry Hyman, an independent consultant.
Delos Smith, senior business analyst at the Conference Board, agrees. "Retail has been hit harder because consumers are focusing on long-term purchases, and auto and housing are still very attractive with all kinds of bargains and the low rates," he said.
To be sure, low interest rates have helped the economy through some tough times, namely after Sept. 11, when economic activity would have fallen more drastically if it hadn't been for the 0% financing campaigns in the auto industry, many say.
Also, low rates aren't the only factor taking a toll on retailers. Consumers are worried about losing jobs amid a faltering economy and are therefore being more careful with their spending. The March unemployment rate was 5.8%, with the economy losing 108,000 jobs in the month. Consumer confidence dropped to 62.5 in March from around 80 at the end of 2002. The same goes for personal spending, which hasn't grown since the start of 2003.
The latter has deeply affected the retail sector. Excluding auto sales, retail sales posted a 1% drop in February, and they recently have faced the largest declines in more than a decade, on a yearly basis.
In contrast, the auto and housing sectors have been performing well, on a historical basis, thanks to 0% financing deals at auto companies and lower mortgage rates in the housing sector. Total vehicle sales hit 16.6 million on an annualized basis in March, a level comparable to what they reached between 1995 and 1997, when the economy was booming. Granted, the figures are lower than the 18.6 million of December but still much above the 13.4 million vehicles sold on average last year.
"I certainly don't think consumers have stopped spending. They are simply putting off buying nonessential items," said Jennifer Rossum, an economist at Thomson Financial.
So what will force consumers to go back to their old retail spending habits? Companies say that for starters, the war with Iraq, the mysterious Asian pneumonia and the unusually bad weather need to end before the economy has a chance to rebound, sending people back to their old shopping habits.
But analysts warn that things won't be getting better anytime soon. Retailers are expected to continue posting weaker numbers as long as the economy remains feeble. Economists note that there is still a lot of excess capacity in many industries, including retail, and that even with a rebound, it would still take time for the consumer to soak up this surplus.
Shares of J.C. Penney and Nordstrom have shed 13% this year, while Federated shares have lost 2%. Wal-Mart has managed to buck the trend, however, by gaining 7%.
Meanwhile, the Big Three automakers have forecast a very healthy April. After
announced an incentive program with 0% financing for up to five years,
followed suit. The companies and analysts alike expect the aggressive strategy to yield strong sales this month.
As for housing, total home sales are close to their highest level in more than a decade, with the number of existing-home sales at around 6 million units since the end of last year. The number fell slightly in February, but analysts believe demand will continue to outpace supply, as long as interest rates remain low.
But that doesn't necessarily mean the housing and auto sectors are off the hook. Many analysts believe the current trend is unsustainable in the long term. They note that automakers are borrowing from future sales and won't be able to keep up their aggressive incentive programs indefinitely. This has been priced into the sector's shares, with GM losing 5% since the start of 2003 and Ford sliding 15%. DaimlerChrysler has posted a more modest loss of 1%.
The same goes for the housing sector, which many economists believe is set to deflate if the economy starts to pick up and interest rates start to move higher.