Wal-Mart’s Problems Point to Deeper Issues in US Economy

Wal-Mart’s problems may well reflect deeper issues in the US economy.

The giant retailer announced Wednesday that profits could drop as much a 12% in the next year. It’s stock plummeted 10% on the news. Company officials also warned they now expect sales growth for the current fiscal year to be flat. In February, the company predicted 1 to 2% growth.

According to the Wall Street Journal, the cost of recent wage increases is weighting heavily on the company’s profit margin:

For the first time Wednesday, Wal-Mart detailed next year’s costs of raising wages for its more than one million store workers. In April, the company raised the minimum hourly wage it pays those employees to $9, and will raise that to $10 for most in February. The higher pay will add $1.2 billion to costs this year and another $1.5 billion next year, the retailer said.”

But Wal-Mart’s problems aren’t just increasing costs. Sales revenue is also expected to drop, according to a Reuters report.

Wal-Mart Stores said current fiscal full-year sales would be flat due to the stronger-than-anticipated impact of the dollar. It had previously forecast net sales growth of 1-2 percent for the current fiscal year ending January.”

The mainstream financial media generally spun Wal-Mart’s problems as purely Wal-Mart problems. But as Peter Schiff pointed out in his podcast, the giant retailer may well be the “canary in the coal mine,” warning of more generalized economic issues.

In fact, overall US retail sales came in weaker than expected in September. Even the Wall Street Journal deemed them a “disappointment.”

Retail sales rose a seasonally adjusted 0.1% in September from August, the Commerce Department said Wednesday. Economists had expected a rise in September of 0.2%. The increase was largely due to a 1.8% month-over-month increase in auto sales. Excluding motor vehicles and parts, sales at other retailers were down 0.3% in September.”

Things appear even gloomier when you dig deeper into the numbers. August retail sales were revised downward from .2% to zero, so September and August were both sluggish.

Overall sales were also down, and inventories crept up. As we reported earlier this week, the absolute dollar spread between inventories and sales has never been higher.

Wal-Mart’s problems clearly aren’t isolated. Peter argues Wal-Mart’s plight has big implications for the overall economy.

Wal-Mart is where America shops. Everybody says the economy is based on consumer spending. Well, where do they think consumers spend? At Wal-Mart. If Wal-Mart is having a problem, you can’t just dismiss that. Wal-Mart is the big seller. It is the big gorilla in the room, and you can’t ignore that.”

All of this makes the likelihood of a Federal Reserve rate hike in the near future even more remote.

Fed Chair Janet Yellen still says she expects a rate hike before the end of the year. But she predicates this on her economic forecast. As Peter said, her forecast is wrong:

All of this theater is all about the Fed trying to gradually take the rate hikes off the table while maintaining that they were planning on raising rates all along. Now of course, if they were planning on raising rates all along, it just means they are incompetent.”

As we reported yesterday, comments by Fed Governor Daniel Tarullo reveals sharp division within the bank’s leadership. Bloomberg reports Tarullo told CNBC the central bank should hold off on raising rates, lining him up with fellow Governor Lael Brainard, who also made the case for patience.

All of this bodes well for gold. In fact, billionaire Paul Singer said every investor should buy gold. You can read more about future of the US economy and the gold market in Peter’s special report, Why Buy Gold Now? Download the free report HERE.

This post is part of our ongoing series Data Dependent: Reading Between the Lines, where we examine the real economic data not reported in the financial media. Click here to read all our articles in this series.

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