Why Wal-Mart's sales should have everyone worried

(Fortune) -- It certainly looks like happy days are here again. Many of the nation's biggest retailers, including Saks, Hewlett-Packard, Home Depot, and Target have released cheery sales reports. April's jobs reports showing a slight increase in the workweek and pay for workers, and more hiring across the board.

And then there is Wal-Mart, whose happy yellow face switched to a grimace when it released first quarter sales on Tuesday. Although international growth helped push revenues up 6%, sales at U.S. stores fell 1.4% from the same period last year. And the company had no one to blame but its shoppers. "More than ever, our customers are living paycheck to paycheck," said Tom Schoewe, the chief financial officer.

So who are you supposed to believe? In this case, Bentonville. When Wal-Mart (WMT, Fortune 500), an economic bellwether, notes that customers can't afford the gas to get to the stores and that they're increasingly using food stamps when they get there, things are bad.

True, other consumer-dependent companies are doing better, but by how much? Hewlett-Packard (HPQ, Fortune 500) made its numbers by selling hardware to corporations, not consumers. Home Depot (HD, Fortune 500) was pulled forward by do-it-yourselfers buying small items and by homeowners making one-off summer purchases of new landscaping tools and grills; big ticket items are still sitting collecting dust, while the contractor business remains weak. Saks (SKS)' results were impressive, but it sells luxury goods to a sliver of the American demographic, one that benefitted most from the psychologically important stock market rise earlier this year.

The problem is that both the economy and consumer sentiment remain shaky. Even Target (TGT, Fortune 500), which reported better than expected results yesterday, was forced to concede that. While touting his company's success, Chief Executive Gregg Steinhafel, noted that "We believe that both are still somewhat unstable and fragile and will likely continue to experience occasional setbacks as the year progresses," he said.

On shaky ground

That frailty in confidence hasn't been helped by the flash crash or the video of rioting in Greece. But there are also more structural concerns that could affect the durability of the US recovery. Overall, while retail sales have continued to expand over the last seven months, the rate of increase has slowed since March. Also, much of the retail rebound has taken place on the shoulders of wealthier consumers -- about 40% of all spending currently comes from the 20% of households with the highest incomes.

That spending, juiced by earlier stock market gains, has led wealthy Americans to spend their savings at an increasing clip (a cause for concern in and of itself). If that isn't worrisome enough, how about the fact that other retail fuel has come from a decidedly different source: Americans walking away from their debt-sopped homes, which has freed them to spend again.

You can't build a sustainable consumer-led economy with that kind of material. And the setbacks mentioned by Steinhafel could be more prolonged if the Wal-Mart demographic doesn't start putting more skin in the game.

That demographic remains large.The unemployment rate still hovers around 10%. Moreover, the rate of under-employment (those whose hours are cut or can only find part-time work) continues to increase, and more than 40% of the employed are now working in what are often low-wage service jobs. These Americans are going to need more than confidence to get moving. They are going to need more work and more money.

So far, they're getting neither. Real wages have continued to decline. Inflation-adjusted personal disposable income has remained relatively flat. And, even if current economic growth were sustained, it would take more than three years to bring the unemployment rate below 6.3%, where it was at the peak of the 2001 recession. Meanwhile, the Mortgage Bankers Association reported yesterday that the number of mortgages in foreclosure has climbed to a new record, with foreclosures and delinquencies now accounting for one out of every seven US mortgages out there.

Wal-Mart has tried to spin this dismal situation as something of a lucky break for future quarters, with Schoewe noting the fact that "our customer remains under pressure" will speak "positively to the opportunity for Wal-Mart" in the future. That view may be a bit Pollyanna-ish given the their customer's current straits.

Of course, if they can scrape together enough money to buy the gas to get there, they might just spend up a storm.