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Sales forecasts lowered
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September 20, 2001: 1:38 p.m. ET
Slower consumer spending after terrorist attacks could tip U.S. into recession
By Staff Writer John Chartier
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NEW YORK (CNNfn) - On Tuesday, Sept. 11, Americans watched horrified as terrorists slammed three jumbo jets into the World Trade Center and the Pentagon, resulting in more than 5,500 people missing or dead.
Suddenly, catching big bargains at the mall no longer seemed so important.
While it may seem callous to worry about whether stores make money after such a tragedy, that's exactly what Wall Street is doing since consumer spending, already weak before the attacks, accounts for two-thirds of the mammoth U.S. economy.
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Sales plummeted after terrorists reduced the World Trade Center to rubble last week (CNN/FILE) | |
Many experts believe a protracted slowdown on Main Street would help push the country into recession.
"We buy into the view that the decline is going to be sharper and it will potentially take longer to come out of the recession," said Mark Miller, a retail analyst with William Blair & Co.
More Americans went to their local mall during the weekend following the attack compared to a week earlier, according to Retail Consumer Traffic, a retail tracking organization. Traffic was up 1.67 percent the weekend ending Sept. 16 from the previous weekend, Jim Martin, a spokesman for RTC said.
But don't be fooled. Retail traffic in the U.S. tumbled 7.7 percent compared with the same weekend a year earlier.
The National Retail Federation halved its fourth-quarter sales expectations Thursday to 2.2 percent growth from 4 percent compared with a year earlier. The group also forecast a 2.5-to-3 percent increase in 2001 holiday sales. That's substantially lower than the 5.3 percent holiday sales growth in 2000.
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We buy into the view that the decline is going to be sharper and it will potentially take longer to come out of the recession
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Mark Miller
Retail analyst
William Blair & Co. |
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Before the attack, consumers were largely credited with propping up an economy slowed by volatile stock markets, high fuel prices, and mounting corporate layoffs.
On Sept. 14, the Commerce department reported that U.S. retail sales actually rose in August after remaining flat in July, a sign that consumers were supporting the economy before the attacks.
But no one can say with any degree of certainty how consumers will react in the coming days. Certainly there will be a slowdown, analysts said, but the extent of it depends on a variety of factors ranging from corporate layoffs in the wake of the tragedy to the swiftness and effectiveness of a military retaliation.
Clearly, Wall Street is nervous.
Before Tuesday's attack, analysts were forecasting a 6.6 percent year-over-year increase in retailers' third-quarter earnings, according to earnings tracker First Call. After the tragedy, expectations tumbled to 6.2 percent.
"The short-term impact is pretty clear and pretty obvious, and it's to be expected. Traffic really dropped off," said Michael Baker, director of research at the International Council of Shopping Centers. "The main effect of Sept. 11 was to exacerbate a trend that was already in place, and that is that consumers were really buying consumables and buying them in discount outlets. How quickly that will turn around? Your guess is as good as mine."
Miller, who believes the economy was in recession before the attacks, said one potential positive for consumers is a spending slowdown likely means they will begin to pay off the mountainous debt accumulated in the 10-year economic expansion that ended last year. And that should lead to even greater spending whenever the economy recovers.
Experts agree however that last Tuesday's events, which were unprecedented in U.S. history, leave too many questions about the consumer unanswered.
Consumer confidence, a key economic indicator for retailers, is a major concern; that confidence had begun to slip before the attacks and then tumbled the weekend after.
"What you have are some pretty weak indicators leading up to that event," Miller said. "Consumer confidence plummeted in the weekend after the attacks and housing starts are down significantly. Consumer confidence is sure to fall substantially."
Home sales are another indicator retailers monitor, and until recently they had remained robust, thanks to lower interest rates that made it easier and more affordable to finance a home. However, the latest industry figures released Thursday revealed a sharp drop in housing starts last month, another sign that consumer confidence is beginning to fray.
Already several companies have announced big job cuts, particularly in the airline industry, where many consumers are now afraid to fly and carriers have significantly cut back on departures as a result.
Layoffs could also cause a clampdown on retail sales. On Wednesday American Airlines and United Airlines, whose planes were the ones hijackers commandeered in last week's attacks, each slashed 20,000 jobs. On Thursday British Airways said it would cut 7,000 jobs. And aircraft maker Boeing Co. said it would eliminate 20,000 to 30,000 jobs by the end of 2002.
Such large cuts, coupled with strong emotions will likely cause the consumer to pare back significantly on shopping, at least in the near-term.
And oil prices could also pinch consumers if they spike in the coming months. Some worry that a war in the Middle East could choke off, or seriously hamper supply, causing gasoline and home heating oil prices to jump. However, some also argue that the heavy cutbacks in the airline industry will sharply reduce demand for fuel, helping to keep pump prices in check.
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Some still hold out hope that consumers and the economy will just manage to escape a recession and that retail will bounce back.
"We might skirt near a recession, and this could change tomorrow ... but layoffs aside for a second, there are some positives," said Scott Krugman, a spokesman for the National Retail Federation. "The government is being very active by putting liquidity back into the economy, and recent tax rebates and cuts in the tax rate have helped consumer confidence."
Individual retailers' results show that consumers themselves are not sure how to react.
Wal-Mart Stores Inc. (WMT: up $0.06 to $45.51, Research, Estimates), the world's biggest retailer, had been posting 5 percent or more monthly gains in sales at stores open at least a year, a key retailing gauge known as same-store sales, before the attack.
When the terrorists struck, the Bentonville, Ark.-based chain saw sales plummet more than 55 percent that day, as most stores closed and people stayed home glued to television news coverage of the attacks. However, sales began to bounce back in the days immediately following, and by that weekend, had returned to "normal" levels.
Similar stories came from Sears Roebuck & Co. (S: down $1.06 to $32.02, Research, Estimates), Federated Department Stores Inc. (FD: down $0.65 to $27.35, Research, Estimates), and the rest of the sector. Though sales plummeted in general, sales of a few specific items spiked, including flags, ribbons, gas cans, and spiritual books.
Yet even as consumer spending slows, people will still spend money on food, clothing and other necessities, meaning some retailers like discount chains and grocery stores will fare better than luxury or big-ticket items.
"Who goes out now and pays $350 bucks for a Coach bag? In times like these, you don't really go for fashion, you go where you can get the necessities," said Ulysses Yannas, a retail analyst with Buckman Buckman & Reid. 
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