What Retail's Rebound Means for Shoppers and Investors

Last week, the National Retail Federation (NRF) put out its 2011 economic forecast, predicting that retail sales will increase 4% over 2010. This projection seems to fall in line with other economic indicators: Consumer confidence is up, home prices are starting to stabilize in many markets and unemployment is shrinking, albeit slowly.

It also mirrors recent research from the National Foundation for Credit Counseling that found we're getting a little tired of pinching pennies.

All in all, a boost in retail sales is good news, of course. But what, exactly, does it mean for your wallet -- and what are you going to see over the course of the year?

Here's how Jack Kleinhenz, NRF's chief economist, thinks it will all shake out:

More Optimism
We know this from the most recent consumer confidence survey, and NRF's forecast confirms it. Over the past few years, consumers have really been keeping their wallets closed, and that's slowly starting to change, which will help prop up the economy. "A number of issues have curtailed spending by consumers during this recovery, when in the past, during other recovery cycles, consumers have tended to start spending much earlier in the process. That hasn't happened until recently, but now consumer sales are bouncing back, and there is a good indication that there is more confidence in the economy. The outlook is more favorable overall," explains Kleinhenz.

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A New Hitch
Gas prices are on their way up, and that always cuts into discretionary spending. Last month, we saw Social Security tax cuts -- the withholding was reduced from 6.2% to 4.2% -- that put some extra money in our paychecks every month. Unfortunately, the impact of that extra cash might be absorbed by these higher gas prices, says Kleinhenz, which has the potential to hurt retail sales. In the past, consumers may have adjusted better to higher gas prices, but these days, we're wary. "Historically, when we had higher gas and energy prices occur, people said they'd spend more on gas but they weren't going to cut back on other things. Today, consumers are much more prudent given the way the economy has preformed." Being more careful is good for your wallet, but not necessarily for the economy.

Higher Prices
Kleinhenz expects that retailers will continue to attempt to spark sales with value pricing, but there's another wrench in the progress: Cotton prices are up due to poor weather and increased demand. That could translate into higher prices for retailers (you may have already noticed prices inching up at the mall). "Not everything will increase in price, because there could be substitution of wool or synthetics. But there could be price acceleration in certain clothes that have a higher cotton content, and you see more of those in the spring and summer," explains Kleinhenz. Baby clothes, in particular, may be hit.

Investment Opportunities
When consumers have more discretionary income, retailers tend to do better. So, Kleinhenz says there could be an argument for investing in retailers that have the ability to capitalize on that, and show it in their quarterly or annual sales performance. But, as always, you have to look at your portfolio as a whole. You always need to be mindful of your long-term goals, and the best portfolios focus on diversification, not chasing the next hot stock.

Kleinhenz notes that the data from the NRF isn't all-inclusive. "When we compute our retail sales number, we actually exclude some numbers in the data, because some things just aren't as consumable on a regular basis. So, we exclude automobiles, gas stations and restaurants. When we look at retail sales, we're looking at the core activities that are traditional retail." The projections are based on stores you'd find in a mall, plus independent retailers, grocery stores and discount outlets.