Why Wal-Mart’s bad news could be good news for the economy

February 21, 2013

The world’s largest retailer has been the source of some unwelcome news about the economy of late. Internal e-mails from executives of Wal-Mart leaked earlier this month, and presented a dire picture of what is happening to the American consumer, particularly the low-to-middle income consumers who spend a lot of their money at Wal-Mart.


It's the tax refunds, stupid!

“Where are all the customers? And where’s their money?” asked Cameron Geiger, a Wal-Mart senior vice president, in e-mails obtained by Bloomberg News that also described February sales to that point as “a total disaster.”

Aside from making us wish that corporate executives would discuss their companies’ results with reporters using the same colorful bluntness that they apparently use in internal communications, the leak prompted a wave of fears that a dangerous consumer spending slowdown was underway more broadly, and that the economy as a whole might be in danger. Well-run companies can get sales results in something close to real-time while compilers of official government statistics can take weeks or months. As my colleague Brad Plumer noted, even Federal Reserve officials have frequently cited what they hear about the economy from Wal-Mart as an early warning of trends to come.

But Thursday morning, Wal-Mart released its official financial results for the quarter that ended in January—and an accompanying conference call that gave its official take on what is happening so far in February and what its leaders expect for the rest of the year. The results indeed weren’t very good; the company expects flat sales in its United States Wal-Mart stores for the February through April period compared with a year ago. By contrast, for all of its just-finished fiscal year, sales for that division were up 3.9 percent.

There are four major possibilities for what is weakening consumer spending right now. In order from least worrisome to most: Shifts in when people received tax refunds due to the last-minute negotiations over tax rules at the end of 2012; a higher payroll tax that has reduced workers’ after-tax income; higher gasoline prices in February; and some mystery X factor, psychological or otherwise, that is leading Americans to pull back on spending.

The first of these isn’t cause for any concern. Congress was tweaking the 2012 tax code until New Year’s Day, and so people couldn’t file as early as they usually could, and so people who in the past have received their refund check at the start of February are getting them in late February instead. Many of those people presumably used those checks to buy a new flat-screen TV or other major purchase at Wal-Mart, and to the degree that’s the problem, it just shifts purchases around within the quarter.

The other factors are more cause for concern. If the payroll tax hike and higher gasoline prices pinch consumer spending enough, it will be bad for the overall economy. But the good news, if there is any, is that these should be one-time hits; once spending levels have adjusted to the new normal levels of gas prices and lower levels of after-tax income, spending should level off and rise from that point.

The scariest possibility would be if the Wal-Mart memos were the earliest evidence of a broader crisis of confidence in the economy, one that might presage a new recession or steep downturn.

The good news out of Wal-Mart’s earnings release is that its leaders see the first, and most benign, possibility as the biggest driver of the crunch. “February sales started slower than planned due in large part to the delay in income tax refunds,” said Bill Simon, president of Wal-Mart U.S., in a recorded conference call the company released Thursday morning.  “We began seeing increased tax refund check activity late last week in our stores.  This resulted in a more normalized sales pattern for this time of the year.”

He acknowledged rising gasoline prices and payroll taxes as factors in sluggish January sales. But he gave no hint of the X option being the case; Simon and his fellow Wal-Mart executives seem to view the crimped consumer spending that seemed so dramatic in some of their colleagues’ e-mails as explainable by the usual factors that affect spending patterns—not some scary economic monster lurking under the bed.

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February 21, 2013

The world’s largest retailer has been the source of some unwelcome news about the economy of late. Internal e-mails from executives of Wal-Mart leaked earlier this month, and presented a dire picture of what is happening to the American consumer, particularly the low-to-middle income consumers who spend a lot of their money at Wal-Mart.


It's the tax refunds, stupid!

“Where are all the customers? And where’s their money?” asked Cameron Geiger, a Wal-Mart senior vice president, in e-mails obtained by Bloomberg News that also described February sales to that point as “a total disaster.”

Aside from making us wish that corporate executives would discuss their companies’ results with reporters using the same colorful bluntness that they apparently use in internal communications, the leak prompted a wave of fears that a dangerous consumer spending slowdown was underway more broadly, and that the economy as a whole might be in danger. Well-run companies can get sales results in something close to real-time while compilers of official government statistics can take weeks or months. As my colleague Brad Plumer noted, even Federal Reserve officials have frequently cited what they hear about the economy from Wal-Mart as an early warning of trends to come.

But Thursday morning, Wal-Mart released its official financial results for the quarter that ended in January—and an accompanying conference call that gave its official take on what is happening so far in February and what its leaders expect for the rest of the year. The results indeed weren’t very good; the company expects flat sales in its United States Wal-Mart stores for the February through April period compared with a year ago. By contrast, for all of its just-finished fiscal year, sales for that division were up 3.9 percent.

There are four major possibilities for what is weakening consumer spending right now. In order from least worrisome to most: Shifts in when people received tax refunds due to the last-minute negotiations over tax rules at the end of 2012; a higher payroll tax that has reduced workers’ after-tax income; higher gasoline prices in February; and some mystery X factor, psychological or otherwise, that is leading Americans to pull back on spending.

The first of these isn’t cause for any concern. Congress was tweaking the 2012 tax code until New Year’s Day, and so people couldn’t file as early as they usually could, and so people who in the past have received their refund check at the start of February are getting them in late February instead. Many of those people presumably used those checks to buy a new flat-screen TV or other major purchase at Wal-Mart, and to the degree that’s the problem, it just shifts purchases around within the quarter.

The other factors are more cause for concern. If the payroll tax hike and higher gasoline prices pinch consumer spending enough, it will be bad for the overall economy. But the good news, if there is any, is that these should be one-time hits; once spending levels have adjusted to the new normal levels of gas prices and lower levels of after-tax income, spending should level off and rise from that point.

The scariest possibility would be if the Wal-Mart memos were the earliest evidence of a broader crisis of confidence in the economy, one that might presage a new recession or steep downturn.

The good news out of Wal-Mart’s earnings release is that its leaders see the first, and most benign, possibility as the biggest driver of the crunch. “February sales started slower than planned due in large part to the delay in income tax refunds,” said Bill Simon, president of Wal-Mart U.S., in a recorded conference call the company released Thursday morning.  “We began seeing increased tax refund check activity late last week in our stores.  This resulted in a more normalized sales pattern for this time of the year.”

He acknowledged rising gasoline prices and payroll taxes as factors in sluggish January sales. But he gave no hint of the X option being the case; Simon and his fellow Wal-Mart executives seem to view the crimped consumer spending that seemed so dramatic in some of their colleagues’ e-mails as explainable by the usual factors that affect spending patterns—not some scary economic monster lurking under the bed.

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Ezra Klein | February 21, 2013