Stimulus spent, retailers face tough rest of year

That doesn’t bode well for the holiday shopping season, when many retailers look to make the bulk of their sales and profits for the year. With wages rising more slowly than inflation, consumers will have an even harder time making ends meet after their rebate checks have been spent.

“We think that when the stimulus checks end, which is this quarter, we’re going to hit an air pocket and disposable income will take a negative hit relative to what we saw in the second quarter,” said Brian Bethune, an economist with Global Insight.

There’s already talk in Washington about another round of stimulus checks to help offset the higher cost of energy. But with Congress in recess and the fall campaign heating up, it remains to be seen how quickly such a measure could be enacted.

There’s also considerable debate over whether the money would be better invested in infrastructure projects like rebuilding crumbling roads and bridges, which would help create jobs and could provide a more sustainable economic boost. The debate will also center on whether the benefits to the economy would offset the negative impact of borrowing more money the government doesn’t have.

“We have a $400 billion deficit, likely this year, more than double last year,” said Diane Swonk, chief economist at Mesirow Financial. “That's a lot of deficit going into the economy without a lot of payoff because it was driven by tax stimulus checks."

The recent pullback in oil prices may take some of the pressure off household budgets. But energy prices are still substantial higher than this time last year, and retailers have begun passing along their higher costs with selected price increases.

Faced with sluggish sales, store managers are also tightening their belts, cutting expenses where they can and keeping a tight rein on inventories. That will likely mean less surplus inventory — and fewer markdowns for consumers accustomed to waiting for seasonal sales promotions.

Unless energy prices fall further, the holiday shopping season will also likely be hurt by consumers' increased cost of heating their homes. Heating oil prices have roughly doubled since last year; natural gas price have also jumped. For consumers in cold weather states, those higher costs will begin showing up in their November and December heating bills, just as the holiday shopping season gets under way.

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