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Tuesday, October 21, 2003 - Page updated at 12:48 A.M.

The Wal-Mart effect: Top retailer is widely seen as gauge of U.S. economy

By Steve Matthews
Bloomberg News

A Wal-Mart store in the Chicago suburb of Niles, Ill., had a full parking lot one afternoon last spring. Though business remains brisk, store sales are growing about half as fast as in the past decade.
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The U.S. economy is in Judy Leonard's shopping cart in the paper-goods aisle in the Lexington, N.C., Wal-Mart.

Her cart holds Great Value freezer bags for $1.94, 40 percent less than Ziploc bags; Mardi Gras paper napkins at 82 cents, half the price of Vanity Fair; and a two-roll package of Sparkle paper towels at $1.98, a third less than Bounty. "I am trying to cut back," said Leonard, 55, a clothing-plant worker. "I don't know how long my job is going to be here."

Wal-Mart Stores cares about the contents of her cart because store sales are growing about half as fast as in the past decade. The U.S. Federal Reserve and private economists watch her spending because they use the world's largest retailer as an economic indicator. The company accounts for 9 cents of every U.S. retail dollar, and its cash registers check out 19 million customers a day, more than any other chain.

Four also-rans

The chain's executives recognize that economists take interest in Wal-Mart's sales because they are larger than the combined total of the next four biggest U.S. retailers: Home Depot, Kroger, Target and Sears.

Fed governors and staff call the chain's Bentonville, Ark., headquarters to check sales, while Fed Chairman Alan Greenspan has spoken with Chief Executive H. Lee Scott, Wal-Mart said. That makes Wal-Mart, the world's biggest seller of toys, diamond jewelry, underwear and DVDs, a key indicator of whether U.S. consumers are spending more as a result of President Bush's $330 billion tax cut.

"Any economist who does not pay attention to what Wal-Mart has to say is missing the boat," said Richard Yamarone, an economist at Argus Research. "A lot of people are postponing purchases until the job market improves and job creation begins."

The initial evidence: The tax cut won't spark a spending boom.

While sales at Wal-Mart's U.S. stores open at least a year climbed 6.9 percent in August from a year earlier, the biggest rise in 14 months, Treasurer Jay Fitzsimmons cautioned Sept. 4 that the increase might be short-lived. The boost from the tax-cut payments won't last, he said. September sales rose at the high end of its forecast of 3 percent to 5 percent, the company announced. October sales in stores open at least a year are likely to rise within the same range, Fitzsimmons said.

Running out of steam

The chain's forecast indicates consumer spending may not accelerate in coming months, said Gene Huang, chief economist for FedEx, the world's largest overnight-delivery company.

"Wal-Mart is a very good gauge," Huang said. "The labor market is still weak. There's no reason to expect a strong recovery in the consumer sector."

Economists focus on Wal-Mart because its customers' income mirrors the U.S. as a whole. Wal-Mart shoppers earn about $1,000 less per family in annual income than the $42,000 median U.S. household, said Britt Beemer, chairman of America's Research Group, a consumer survey company.

Sales are rising 3.4 percent this year at Wal-Mart and Sam's Club stores, about half the average gains of the past decade, reflecting U.S. economic growth of 2.25 percent as opposed to 3.23 percent in the past 10 years.

The company also reflects changes in consumer demand: Wal-Mart sold 903,000 rolls of duct tape in two weeks after Homeland Security Director Thomas Ridge called for stepped-up emergency preparedness in February.

Spend or save?

Those characteristics make Wal-Mart a test of whether consumers will spend or save the $14 billion in tax-credit payment checks that 25 million families received from July 15 to Aug. 8. Wal-Mart Vice Chairman Thomas Coughlin said its shoppers may use that money to pay bills or save in case they lose their jobs after unemployment peaked at a nine-year high of 6.4 percent in June.

Bush says his $330 billion tax package reduces taxes for small businesses, investors, parents and other wage earners to stimulate spending. About 45 percent of the reductions help investors, mainly by lowering the maximum tax rate on dividends to 15 percent from 38.6 percent.

Wal-Mart shoppers may get less help from the tax cut than the overall U.S. population because of the average income of the chain's shoppers. While about 60 percent of Americans with household incomes of $24,000 to $36,000 have shopped at Wal-Mart in the past few months, the proportion drops to a fourth of members of households with incomes of at least $75,000, Beemer said.

Corporate ties

Wal-Mart's U.S. sales of $203.7 billion, out of $244.5 billion worldwide for the year ended Jan. 31, affected more than 21,000 suppliers. The company sells more than half of AT&T's phone cards and Procter & Gamble's Swiffer dust mops.

Companies including candy maker Hershey Foods, bleach maker Clorox, cosmetics maker Revlon and battery producer Rayovac get more than 20 percent of their sales from Wal-Mart.

"As Wal-Mart goes, to a large degree, that is how Dial goes," said Dial Corp. Chief Executive Herbert Baum in an interview. Dial, the maker of soap and Purex detergent, got 28 percent of its sales from the company last year.

About 500 large manufacturers, including Procter & Gamble, Kraft Foods and Sara Lee, have set up offices in Bentonville, population 20,000, to be near Wal-Mart's headquarters. The local airport added a direct air route in June to Los Angeles, the 13th direct service.

"They more or less approximate the retail market," said Alex Taylor, president of Chattem, the maker of Selsun Blue shampoo and Ban deodorant. "When the average Wal-Mart customer is nervous about his job or he's out of work and isn't going to Wal-Mart as much as he used to, that's concerning to us."

Biggest private employer

Chattem executives scrutinize Wal-Mart's weekly sales reports every Monday to get a sense of consumer spending — as well as weekly sales for each of the company's products provided by Wal-Mart's information-systems work force of more than 2,000.

Wal-Mart's economic effect extends further: The company's 1.1 million U.S. employees make it the nation's biggest private employer. The chain plans to hire 800,000 more workers in the next five years.

Other employers have cut 1.4 million jobs since the economy emerged from the latest recession in November 2001, according to the Labor Department.

"Without Wal-Mart, the country would be in a deep recession," said John Challenger, of the Challenger, Gray & Christmas outplacement firm, who has served on the labor/human resources committee of the Federal Reserve Bank of Chicago.

By spending on computers to track inventories and linking its information with suppliers to reduce supply costs, Wal-Mart contributed to an acceleration in U.S. labor productivity gains in the late 1990s, the McKinsey & Co. consulting firm reported. Retail productivity, spurred by Wal-Mart, contributed a fourth of the increase in labor productivity from 1 percent a year from 1987 to 1995 to 2.3 percent a year from 1995 to 1999, the firm estimated.

Wal-Mart's computer network with suppliers was cited last year in a speech by William Poole, president of the Federal Reserve Bank of St. Louis, as "a powerful engine of technology transfer for the entire U.S. economy."

Poole, whose district includes Wal-Mart's headquarters, is among the Fed officials who track Wal-Mart sales.

Wal-Mart spokesman Tom Williams said "from time to time the Treasury Department at Wal-Mart does receive calls from the Fed, sometimes from staff, sometimes from governors and others. Generally they are asking about the American marketplace. Also, Lee Scott, on occasion, has spoken with Mr. Greenspan on that same subject."

Katrina Collins, a teacher in Anderson, S.C., goes to Wal-Mart at least once a week to try to get the lowest prices on food, photo developing and even manicures.

"At first, it felt really weird watching people shopping while I got my nails done," she said. "I thought they were all staring at me."

She got over the feeling, though: "It's all about getting a bargain."

Such bargain hunting also reflects the overall U.S. economy. Wal-Mart shoppers this year are buying the lowest-price merchandise, including 25-cent Kids Connection sodas and $5.88 second-run DVDs. When Wal-Mart cut prices by 8 cents on Unilever's Suave shampoo to 88 cents, purchases jumped 25 percent.

Consumer prices excluding food and energy advanced at a 1.5 percent seasonally adjusted annual rate in the third quarter ending Sept. 30. The advance at a 1.1 percent rate for the first nine months of 2003 compares with a 1.9 percent rise in all of 2002, the Labor Department said.

Copyright © 2003 The Seattle Times Company

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