The U.S. stock market and Wall Street analysts have built a dream scenario where U.S. corporate earnings will continue growing to the sky, justifying valuations.
But a funny happened on the way to economic nirvana . . . the U.S. consumer began to struggle and spending is weakening. That threatens corporate earnings.
A weakening consumer outlook is reflected in the latest surveys on consumer confidence.
The Reuters University of Michigan consumer sentiment index fell from 85.1 in July to 80 in August. This is the steepest decline in the index since December 2012 and takes the index to the lowest level since April.
But even more importantly to investors, corporate America is sounding a warning bell too.
Retailers Suffer
Many retailing companies, in their recent quarterly earnings report, used one word to describe their earnings . . . disappointing.
Retailers reporting disappointments include Amazon, Macy’s, Nordstrom, and American Eagle.
But primary among the companies whose sales fell short was Walmart, the favored shopping destination for low-income and middle-income Americans. The retail chain reported a 0.3 percent decline in like-for-like store sales in the United States.
Low-income and middle-income American consumers are dealing with a still high unemployment rate, high energy costs, and one other factor that Walmart pointed to specifically.
That factor is the 45% rise in the payroll tax (back to 6.2%) that took effect in January. That hit this segment of American consumers particularly hard since this segment is little effected by any wealth effect caused by a rising stock market.
About 160 million U.S. workers pay this tax, with the total hit to the economy estimated at $125 billion this year. The increase will cost the average American worker about $700 million annually, says the Tax Policy Center in Washington D.C.
Not surprising then that Charles Holly, CFO of Walmart, told the Financial Times “Our core customer is more in the low income area and. . .there’s not a lot confidence right now in their incomes.”
Retailers like giant Walmart are not the only companies suffering right now.
Small Businesses Still Treading Water
The U.S. small business community is still suffering too.
Small businesses are often less able to withstand weakness in consumer demand than the Walmarts of the world.
Poll after poll conducted among America’s small business community has found that the number one issue is consumer demand.
Small businesses would like to see politicians act to stimulate the economy, such as re-instituting a cut in the payroll tax. But that is unlikely since it is the large firms with the biggest and best-paid lobbyists that have politicians’ ear.
The Fortune 500 companies continue pressing Washington to ease off on regulations and taxes. What small businesses would to see instead is aid for lower and middle income Americans trying to cope with incomes that are not secure and rising prices.
Eventually, this lack of growth and spending power among lower and middle income Americans may come back to bite both the Fortune 500 companies and stock market.
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