Much ado has been made about the recent malaise infecting the retail sector, with Kip Tindell, the chairman and CEO of The Container Store, blaming his company's laggard earnings on what he called a "retail funk." Many are left wondering why exactly consumer spending has been lukewarm despite so many other economic indicators clearly on the upswing, with job growth accelerating, the stock market at new highs, and the housing sector in the midst of a strong rebound. Noted tech investor Marc Andreessen wondered aloud on Twitter, "Are there any potential alternative explanations for a 'surprisingly tepid retail environment'? :-)", suggesting that these numbers remain something of a mystery given the backdrop of everything else happening in the U.S. economy at the moment.
While retailers should be feeling the first real signs of the dark cloud of the 2008 financial crisis finally beginning to lift, they are instead faced with the prospect of a gloomy back-to-school season. comScore's e-commerce spending trends, which reflect the broader trends in U.S. consumer discretionary spending, are indeed pointing in a disappointing direction at the moment. In fact, June's 7.7-percent Y/Y growth rate was the lowest of 2014 by a few percentage points and represented the fourth consecutive month of declines.
So what could be causing the softness in the consumer discretionary sector? While it's clear that stagnating wage growth remains a drag on spending growth, the most significant reason may -- somewhat counterintuitively -- tie back to the surging housing sector. A couple of housing sector data points offer a hint as to why retail sales are soft: Both existing home sales and median home prices are on the incline and tend to peak in the summer months when demand is typically the highest. What this means is that overall consumer outlays on down payments, which are the most significant cash expenditures that most consumers will face, are reaching their highest levels right as we get into the middle of the summer. Pulling together a $20,000 or $40,000 down payment will have a tendency to suppress one's ability to spend on discretionary goods -- at least in the short term. We observed a similar pattern in 2013, which saw demand in the housing market look strong during the summer and coincided with a dip in comScore's e-commerce spending figures, from several months of over 15 percent Y/Y growth rates to just 13 percent growth in July, August, and September.
So as the housing market remains at or near a relative peak this August, we should expect this hot housing market to continue to provide a drag on the back-to-school season. That's not something retailers want to hear, but it is very likely the reality.
The good news, however, is that this near-term headwind is a function of positive momentum in the overall U.S. economy, and we are likely to see increased consumer spending as we move into the back half of the year. Most importantly for retailers, the Christmas season does not appear to be in jeopardy and, barring any unforeseen economic shocks, should actually be a strong one as we emerge from the "retail funk."
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