Leading Economic Indicators Up…Retail Sales Down

There is no doubt that an economic recovery is underway, since the Conference Board announced that the index of Leading Economic Indicators (LEI) rose 0.6% in July, the fourth monthly rise in a row for the LEI. Six of the ten LEI components rose in July, while three declined and one was unchanged. The six-month growth rate for the LEI is now 3%, the highest level since mid-2004.

So far, this is a business-led recovery, with earnings increases based on cost-cutting more than on consumer sales. On Wednesday, The Wall Street Journal reported that same-store sales declined 6.9% at Home Depot (HD), 9.5% at Lowe’s (LOW), 6.2% at Target (TGT), 1.2% at Wal-Mart (WMT) and 15.5% at Saks (SKS). In general, luxury names (like Saks) are hurt the most, while the discounters have smaller declines.

Ironically, economists expect growth at many retailers in the second half of 2009, but this will mostly be due to inventory rebuilding, rather than higher sales. Tighter consumer credit has also hurt sales, especially in regions with rising unemployment and home foreclosures. Bottom line, this will continue to be a business-led recovery until the U.S. consumer comes out of his “funk.”

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