Retail Sales to Hold Up Despite Consumer Stress

We still expect retail sales to increase about 3% this year, despite recent evidence of consumer fatigue -- in June’s dreary retail sales numbers from the Census Bureau and scant hopes for a big rebound in July.

Stronger job growth along with lower gasoline prices will drive up consumer spending in coming months, though the 3% gain will be short of retail sales growth in 2010.

But retailers will have to work hard to get shoppers to spend more. Cost-conscious consumers will continue to keep their eyes peeled for discounts. Hefty price markdowns and free shipping for online orders will become commonplace.

This year’s back-to-school sales may not be much to write home about: The average American family probably won’t spend more than the $600 it spent on school needs a year ago. And once again, most parents will wait until school starts to buy school supplies.

One bright spot in June’s retail sales report: Auto sales and parts forged a comeback. They rose 0.8% after struggling from March through May in the face of supply disruptions following the March earthquake in Japan. Auto dealers posted their first gain since February.

However, excluding sales of cars, gasoline and building materials, consumer purchases, including furniture, electronics, personal care and sporting goods, declined broadly.

Consumers also cut back on dining out in June -- a sure sign of stress. Consumer spending for the second quarter overall was close to zero, a big contrast to the 4% increase in the fourth quarter last year.