Retailers Face a Second-Half Slowdown: Economist

JON SPRINGER

The recent discount-rate cut enacted by the Federal Reserve “should prevent a retail slowdown from becoming a retail meltdown,” an economist told SN last week.

Frank Badillo, senior economist for TNS Retail Forward, Columbus, Ohio, said he doesn't anticipate a crisis, but projects slower growth for retailers for the second half of this year. Global market turmoil — sparked by credit worries in the wake of subprime mortgage defaults and prompting the recent discount-rate cut — will affect retailers and their shoppers in direct and indirect ways, he added.

“Retailers will have to walk a fine line when it comes to reading and responding to their customers' demands,” he said. For example, retailers will have to watch their own inventories in the event that economic conditions result in lower demand for goods. They should also keep an eye on external factors that could affect demand, like the health of their local housing markets and employment trends, Badillo added.

The Federal Reserve on Aug. 17 reduced the discount rate, or the rate the government charges banks for loans, by half a percentage point in an effort to inject liquidity and some stabilization to markets that had become volatile. Some observers interpreted the move as a precursor to an interest rate cut. Badillo said he thought a rate cut was a possibility, but added the Fed would track employment and inflation rates before coming to a decision.

“In some ways the Fed was very reserved in cutting the discount rate,” Badillo said. “They responded to what could have been a large-scale liquidity crisis, but they did not pull out all the stops.”

A slowdown in the housing market, sparked by high default rates on so-called subprime mortgages and their effect on the broader credit markets, will continue in coming months, Badillo cautioned.

“We have not seen the end of the fallout from subprime mortgages. There have been reports that we will face more foreclosures, slow sales and people who are struggling with mortgage payments,” Badillo said. “That will affect many households and cut into their disposable spending, and have an indirect effect on businesses that may shy away from capital investment or pull back on job growth.”

One retailer last week indicated sluggish home sales were negatively affecting its business. BJ's Wholesale Club in a conference call noted its stores in Florida struggled during its most recent fiscal quarter in part because population had grown less than anticipated in areas where BJ's located its stores. That reflected sluggish home sales in the Northeast, said Herb Zarkin, BJ's chairman and chief executive officer (see page 7).