(Bloomberg) -- Through the ups and downs of the choppy U.S. economic expansion, the consumer has been perhaps the lone consistent driver of growth, spending money at a steadily rising clip.
And there have as yet been no real signs in the broad data of that changing, with unemployment, housing and gas prices remaining supportive. But back-to-back lackluster results from retail-industry bellwethers -- Walmart (NYSE:WMT) Inc. and Target Corp. (NYSE:TGT) -- are suddenly raising the possibility of a softening in consumer spending. Or, at the very least, they are sparking some economy watchers to start asking questions.
“The U.S. has enjoyed a consumer-led expansion, and any slowdown in retail sales or shift in consumer behavior should be carefully examined,” said Thomas Majewski, managing partner at Eagle Point Credit Management. “When the largest retailer’s holiday sales were flat versus the prior year, it’s fair to say that’s a red flag.” To be sure, he pointed out that Amazon.com Inc (NASDAQ:AMZN). posted revenue gains of about 20% for the same period.
Neither Walmart (NYSE:WMT) nor Target (NYSE:TGT) has so far pointed to any major concerns about the broader consumer environment, instead blaming the sales falloffs on one-time factors like the shortened Christmas selling season, poor merchandise decisions and a lack of must-have items in categories like toys and electronics. Walmart is already trying to put the poor quarter in the rear-view mirror, saying Tuesday that sales in February have started off well.
There are other signs that consumers remain in good health. The housing market is strong, with sales rallying and permits rising to the highest level since 2007, while continued labor market strength is helping to sustain an economic expansion in its 11th year.
Still, worries persist. While U.S. retail sales rose in January for a fourth straight month, a subset of sales that excludes food services, car dealers, building-materials stores and gas stations was unchanged after being revised sharply downward in December. That so-called control group’s performance is more closely tied to underlying demand, and includes electronics outlets, personal-care shops and clothing stores, which fell the most since 2009 last month.
Consumer spending is helping prop up the economy at the moment while other areas, like manufacturing, have softened. So any weakening there is another sign that first-quarter U.S. economic growth could cool from the previous period’s 2.1% pace, a rate that’s below the Trump administration’s 3% goal for full-year growth. The end of interest-rate cuts, the looming U.S. presidential election and fallout from China’s coronavirus outbreak could also weigh on consumer confidence, analysts have said, jeopardizing a record-long economic expansion.
“Are we starting to see cracks in the U.S. consumer?” Brian Yarbrough, an analyst at Edward D. Jones & Co., said in an interview. “What really happened over the holidays, and why was the consumer not spending?”
Sales of key gift categories rose just 0.2% in the U.S. between Nov. 3 and Dec. 28 compared with the same period last year, data tracker NPD said, hurt by sluggish demand for apparel and toys in particular. Consumers, especially younger ones, are also less enthused about the environmental impact of accumulating more and more stuff and increasingly favor spending their wages on experiences that don’t come in a box.
Amazon (NASDAQ:AMZN) Grab
The spending that is up for grabs is often swept up by Amazon (NASDAQ:AMZN), which accounted for 40% of the sales growth in U.S. retail in the fourth quarter, Evercore ISI analyst Greg Melich estimates. The Internet giant enjoyed a banner holiday quarter, with memberships to its Prime service topping 150 million thanks to a pledge to deliver most items to those dues-paying customers the next day.
As Amazon (NASDAQ:AMZN) thrives, traditional retailers continue to suffer. On Tuesday, Macy’s Inc.’s credit rating was cut to junk by S&P Global Ratings, which said the department-store chain falls on the wrong side of consumer preferences. Bed Bath & Beyond Inc. hired its latest chief executive officer from Target (NYSE:TGT) to turn things around, but could be beyond saving. It’s not just mall-based retailers who are hurting: A trio of supermarkets including New York icon Fairway have filed for bankruptcy this year.
It all adds up to a much tougher road ahead for U.S. retailers.
“One thing we are certain of,” said Scott Mushkin, an analyst at R5 Capital, “is that the outlook seems much more uncertain.”