Reluctant Shoppers Hold Back Recovery

By ANN ZIMMERMAN and SARA MURRAY Major retailers reported that American consumers are continuing to hunker down, casting a cloud over the durability of the U.S. recovery and underscoring the importance of overseas demand in restoring the world economy to health. Retailers across the spectrum provided foreboding reports. Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from the year earlier in the quarter ending in July, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the period as shoppers stuck to buying basics. Building-supply chain Home Depot saw total sales drop 9.1% in the quarter ending in July, and it reaffirmed expectations of a 9% sales drop this year. Retail executives said they don't expect conditions to improve until next spring. Some stores are girding for slow back-to-school and Christmas seasons by cutting inventories. Home Depot chief executive Frank Blake told investors Tuesday that he didn't expect a year-over-year increase in same-store sales until the second half of 2010. "We remain concerned by the high level of foreclosure activity, which we believe continues to put pressure on the housing markets," he said. American consumers appear so shaken by the worst recession since the Great Depression -- and so pinched by unemployment, stagnant wages and stingier lenders -- that they are reining in spending on all but basics. Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift. The retailers' reports serve as a reminder of how it will be consumers, foremost, who will fuel a sustained U.S. recovery. Consumer spending accounts for about 70% of all demand in the U.S. economy. Most economists expect the economy to resume growing in the second half of this year at a modest pace, as U.S. businesses rebuild depleted inventories and the housing market stabilizes. Economists who see a second-half rebound point to a global-manufacturing revival and recent reports that the economies of France, Germany and Japan managed to expand in the second quarter. The Commerce Department said earlier this month that U.S. exports in June rose 1.9% from May after rising 1.6% the month before. But U.S. consumers could be the counterweight. In a survey of economists this month, The Wall Street Journal asked if a substantial increase in consumer spending was needed for sustained growth. Of the 43 economists who responded, 60% said yes. "Not only has employment fallen, but a lot people are facing salary freezes or other cutbacks," said Lou Crandall, chief economist of financial-research firm Wrightson ICAP. "That is going to have a significant drag on consumer spending going forward." One of the few bright spots is the revival of auto sales, helped by the government's "cash for clunkers" program. General Motors said Tuesday that it plans to add 60,000 vehicles to third- and fourth-quarter production plans, following announced increases at Ford Motor Co. last week. Meanwhile, TJX Cos., which operates the TJMaxx chain, said sales rose 4% over the quarter. Tuesday's results come on the heels of Wal-Mart Stores Inc.'s disappointing report last week that same-store sales in the U.S. slid 1.2%. Also last week, the Commerce Department announced that July sales, which encompasses a wide swath of retailers, fell after two months of gains. In Dallas, Ellen Berent, 56 years old, plans to go shopping this week to take advantage of a Texas tax-free shopping days, a back-to-school season tradition in many states. But Ms. Berent, who was laid off from a computer-parts company in May, says she will be more restrained than in the past and won't use credit. "I won't buy anything that I don't have the money for in hand," she said. In Los Angeles, Lucy Inedzhyan, 22, said her spending habits changed after receipts at her family's dry-cleaning business fell 30%. "When I spend, it takes away from the family," she said. Instead of heading to Nordstrom or Bloomingdale two or three times a month, she says she shops for less-expensive clothes -- on the Web site of chain Forever 21, or using coupons to Victoria's Secret. "I don't splurge anymore." Retailers are bolstering profit margins by reining in expenses and cutting inventories. Hoping to avoid the massive markdowns of last year, retailer Neiman Marcus said it has cut its purchases 25%. Such steps played well with investors Tuesday, some of whom feared even worse results. Target shares jumped 7.6% and Saks rose 6.9% after each reported a smaller profit decline than expected. Target shares are up 28% this year and Saks is up 30.6%. But slimmer inventories and less-aggressive discounting can backfire if customers are disappointed by a lack of choice or have been conditioned to wait for discounts before buying. Target's chief executive, Gregg Steinhafel, told investors Tuesday that consumers have become "more promotionally sensitive" -- responding to advertised discounts and using coupons -- a dynamic he says is working against the company. Tighter consumer credit has also hurt. Target, which says about one-third of its overall sales come from credit cards, believes that tightening credit standards on its proprietary cards may have contributed as much as half a percentage point to its same-store sales declines. Earlier this week, the Federal Reserve said a July survey of banks found continued tightening of lending standards as well as a diminished appetite for borrowing among consumers. About one-third of banks said they tightened lending standards on credit cards and other consumer loans since April. No banks reported relaxing them. U.S. households are also reckoning with a large drop in wealth during the past two years. Between the second quarter of 2007 and the first quarter of 2009, the most recent for which Fed data is available, household net worth contracted by 22% amid drops in home prices and the stock market. That gives Americans a greater incentive to save to make up for their paper losses. Economists expect business spending to bolster the economy's recovery in the coming month, in light of extreme inventory-paring. "That wild plunge for production [and] inventories can reverse, because it went well beyond the kind of declines that would be necessary in reaction to weakening consumer spending," said Robert Barbera, the Investment Technology Group's chief economist. "The second half will be the beneficiary of a handsome pop in simply inventory restocking." —Kris Maher, Tom Benning and Sabrina Shankman contributed to this article. Write to Ann Zimmerman at ann.zimmerman@wsj.com and Sara Murray at sara.murray@wsj.com