Retail sales washed out in April

Spending is slowing down. The next question is how sharply consumers will pull back.

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- April proved to be a tough month for the nation's retailers as higher gas prices and spending fatigue after a burst of Easter shopping in March kept consumers tight-fisted last month.

Retail sales fell a surprising 0.2 percent last month, the Commerce Department reported. Economists surveyed by Briefing.com had forecast a rise of 0.4 percent.

Core sales, excluding autos and auto parts were unchanged last month, also much weaker than expected. The forecast was for a 0.5 percent ex-auto increase in April, according to Briefing.com.

A number of economists, noting April's sales softness, said growth in consumer spending would slow markedly in the second quarter. The question now is whether there will be a sharper pullback - an important one since consumers have been the backbone of economic growth for more than a decade. Consumers fuel more than two-thirds of the economy through their purchases of goods and services.

So is the consumer tapped out?

"April was a poor month for retailers. But the blow of the weak April was cushioned a bit by upward revisions to March spending estimates," Nigel Gault, chief economist with Global Insight, wrote in a report Friday.

To his point, March sales were revised to up 1 percent from the 0.7 percent gain originally reported. Excluding autos, sales were also revised higher to a 1.1 percent increase from an earlier rise of 0.8 percent. Analysts exclude auto sales, which have been weak, to get a clearer picture of underlying sales trends.

Moreover, retail industry analysts tend to look at March-April sales together because the yearly calendar shift in the timing of the Easter holiday tends to distort the monthly sales picture.

This year, Easter arrived a week early, which pulled a lot of holiday-related sales from April into March. Some of the nation's biggest chain stores on Thursday, including Wal-Mart, Target (Charts, Fortune 500), Gap (Charts, Fortune 500) and J.C. Penney (Charts, Fortune 500), reported much weaker April sales at stores open at least a year, a key measure known as same-store sales.

Wal-Mart (Charts, Fortune 500), the world's biggest retailer, suffered a dismal 3.5 percent drop in its same-store sales last month, the weakest since the retailer first began reporting that measure in 1980.

Even though Gault advised against concluding that "consumers has run out of steam," he still maintained that the weakness in April "is consistent with [our] view that real consumer spending will rise just 1.7 percent in the second quarter, much slower than the 3.8 percent pace in the first [quarter.]"

Retailers across-the-board suffered sales declines. Among the hardest hit were clothing sales, which dropped 2.0 percent. Sales at department stores fell 2.1 percent and building material purchases sank 2.3 percent. Auto sales fell 1.0 percent in April.

Offsetting those declines was a 1.7 percent jump in gasoline sales, a 1.2 percent gain in furniture sales and a 0.7 percent increase in electronics purchases last month. Excluding gasoline purchases, retail sales actually decreased a worse 0.4 percent in April.

To be sure, the overhang of rising gas prices combined with the ongoing housing slump continues to be a drag on consumer confidence - and spending, economists said.

Gault said gas above $3 a gallon was squeezing some spending on things like clothing, footwear and entertainment products such as books, CDs and DVDs. "If gasoline drops back to around $2.60 in the third quarter, as we anticipate, the consumer will regain some momentum," he said.

Right now, rising gas prices and the slumping housing market are hitting low-income households hardest as evident in Wal-Mart's sluggish sales. Wal-Mart, which averages about 100 million customers a week to its discount stores, caters to many customers living paycheck to paycheck.

Sales at mid-to high-end retailers such as Kohl's (Charts, Fortune 500) and Nordstrom (Charts, Fortune 500) have fared better. "The slower housing activity hasn't fully filtered into the economy yet," said Steve Cochrane, senior economist and managing director with Economy.com.

Even so, the housing softness has made a dent in the broader economy, forcing the nation's gross domestic product (GDP) in the first quarter to grow just 1.3 percent, its slowest pace in four years.

When interest rates were falling and home prices were rising, many low-income consumers quickly refinanced their mortgages at the lower rates, effectively using equity from their homes to fuel their buying.

As rates started to climb, refi activity slowed, as did consumers ability to pull money from their homes. This has also sparked mortgage delinquencies, especially in the sub-prime market, which is typically defined by low-income consumers with poor credit.

"I'm fairly convinced that the worse is yet to come," Cochrane said, regarding the fallout from problems in the housing market.

But maybe not as soon as he fears.

"Consumer spending is definitely not going into a retreat. To say that is to imply that consumers have stopped spending and we know that's not happening. But maybe the rate of growth will slow somewhat," said Stuart Hoffman, chief economist with PNC Financial Services Group.

Hoffman said income growth coupled with strength in the job market - so far - has made Americans confident they can keep shopping, albeit more cautiously.

"Spending is being held in check by gas prices and the decline in home prices but income growth and the stock market are positive for consumers," Hoffman said. "Jobs growth in the first quarter was quite strong but we have to watch this closely especially if employment growth this spring and summer turns out to not be as strong as it was last fall and winter."

For his part, Richard Hastings, chief retail analyst with Bernard Sands, said he's waiting to see how retail sales fare over this year' back-to-school shopping season.

"That's the second-biggest selling season for stores after Christmas," Hastings said. "The sales numbers in July, August and September will be crucial and we'll better know about the state of consumers by October." Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.