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U.S. consumer lagging behind the recovery

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American retailers delivered a rude awakening to economists this week, one that may interrupt the unfolding narrative that the U.S. economy is strengthening. Whether or not the developments temper calls for the U.S. Federal Reserve to ease off on its quantitative easing stimulus this fall, it's a reminder that the economy continues to lack for evidence of a truly robust recovery. Too many low and middle-class Americans are still struggling.

On Thursday, Wal-Mart Stores Inc. cut its profit forecast for the year after sales across its established, conventional store network in the U.S. slid by 0.3 per cent year-over-year in the second quarter. Flat sales growth is in store for the next quarter, as well. Sales are down in many categories, including groceries, electronics and hardlines (such as sporting goods). Consumers also traded down in the quarter in consumables, showing that penny pinching is a factor even in impulse decisions. Wal-Mart CFO Charles Holley explained that post-fiscal cliff tax increases this year and rising fuel prices hit discretionary spending by lower-income shoppers, Wal-Mart's core customer base. Those shoppers don't have "a lot of confidence right now in their incomes."

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But neither do the customers for more upscale retail conglomerate Macy's Inc., according to its CEO Terry Lundgren. He offered a strikingly similar explanation for the company's 0.8 per cent same-store sales decline in the second quarter, saying consumers have "continuing uncertainty about spending on discretionary items in the current economic environment," although sales at its more upscale Bloomingdale's chain rebounded in the quarter. Other retailers, including American Eagle and Aeropostale, have warned of weak second quarter results.

Much has been made of improvement in the housing sector and the stock market this year, but as some commentators noted Wednesday, that does little to help make those in the bottom and middle chunk of the economic spectrum in the U.S. feel wealthier. Meanwhile, economists cheered on the news that the number of new applications for unemployment insurance fell to the lowest level since October 2007, or 320,000 in the week ended Aug. 10, suggesting continued firming in the U.S. labour market. But the number of continued claims continues to hover at around 3 million, and is actually higher than it was seven weeks earlier. And don't forget that a declining unemployment rate this year is due to the fact that so many fewer Americans are looking for jobs, with the labour force participation rate stuck at 63.4 per cent. Investment strategist Ed Yardeni recently noted that most of the 3.6 million decrease in the ranks of the unemployed since October 2009 is due to the drop in the participation rate. In Mr. Yardeni's model, if the rate was at 65 per cent, where it was before the Great Recession, the unemployment rate would be closer to 9.7 per cent, not its June level of 7.6 per cent. (It has since dropped to 7.4). Already some within the Federal Reserve system have argued that the Fed shouldn't even think of raising interest rates until the jobless rate drops to 5.5 per cent, rather than the 6.5 per cent the central bank has proposed.

The United States may be the fastest runner in the global economy right now, but the health of its consumer class could prove to be its Achilles heel.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

Editor's Note: An earlier online version incorrectly named Wal-Mart CFO Charles Holley as Charles Halley. This online version has been corrected.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More


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