Saturday, August 18, 2007

Wal-Mart slumps; leading economic indicator of rocky times ahead?

Decades ago, General Motors’ Charlie Wilson said that what’s good for the country is good for General Motors, and vice versa.

No Sam Walton never made such a claim for Wal-Mart, nor has current CEO Lee Scott. Nonetheless, whether defending Wal-Mart’s pay scale or the “Wal-Martizing” of many small towns, there’s been plenty of economists who have, in essence, been ready to make that claim on behalf of the retailing behemoth.

Well, the flip side of that would be that what isn’t good for Wal-Mart isn’t good for the country. So, if Friday’s report on Wal-Mart sales means anything, it reinforces the likelihood of a recession, in my mind. Home Depot also reported problems, but its sales have been limping for several months. The Wal-Mart news is new and fresh:

Economists said the sluggish performance of the chains — Wal-Mart missed its profit forecast and Home Depot’s earnings dropped — could signal broader troubles in the economy.
“It’s a red flag,” said Jay Bryson, global economist at Wachovia. “If consumer spending starts to weaken, the overall outlook for economic growth will diminish.”
That, Wal-Mart executives said, is precisely what has begun to happen in its 4,000 United States stores over the last three months — even after the chain cut prices on 16,000 products this summer.
“Many customers are running out of money at the end of the month,” said H. Lee Scott Jr., the chief executive of Wal-Mart.

Home Depot started slumping some time back, once adjusted-rate mortgages began to rise, and its fortunes are more narrowly tied to housing. But, Wal-Mart’s problems would seem to reflect broader economic problems, in some cases, and broader economic worries about the future by people who have not been affected.

It is not horrible economic news if a company misses an earnings-per-share forecast by a penny. But, to be 3 cents off is a little more serious. I’m sure WallyWorld is already adjusting its third-quarter forecast. But, unless it outperforms that, rather than just hitting it on the mark, the Street might not be too impressed.

Plus, don’t forget those price cuts on 16,000 items. That forced dozens if not hundreds of Wal-Mart suppliers to do their own adjusting. And, if their products still aren’t selling well, some of them could be looking at layoffs in the future.

That makes it official in my mind; I’ll raise my 12-month recession odds from 2-5 to 1-2.