Andrew, Pete, and I were bantering last week here at CG&G about what the increase in same store sales at Wal-Mart meant. Pete and I thought that, contrary to what others were saying, the increase was not a sign that consumer spending was on the rise, that the worst was not over, and that the increase was actually an indication that consumers were substituting less expensive goods for what they might have bought in the past. Andrew said the increase was not as impressive as some said it was and shouldn't be over-interpreted.

Not to be too self-congratulatory but...not only were were right, but we were right days before the rest of the market got wind to what was actually happening.

Stan and Pete,

What jumps out at me is that a 3.2% gain in revenues seems to barely keep pace with inflation.  Based on the March numbers, core inflation was 2.4% and inflation in food and beverages was 4.4%.  (Wal-Mart's release excludes fuel sales but includes grocery sales.)  So if this were taken as a sign of strength in the economy, I think it's not a very positive sign.  As Pete notes, we should consider the retail sector as a whole and just be patient to get the numbers as they become available.

Stan,

Your instincts are right on.  Our incomes aren't growing very much, but prices are going up, particularly for energy and food, so consumers are shifting away from luxury goods and spending more at Wal-Mart for necessities.  This is an example of income effects being partially offset by price effects.  Consumers are shifting their consumption patterns to keep the highest possible standard of living in the face of slowing income growth.  In other words, consumers are getting squeezed.

Another way to see this is to examine retail sales. The latest Census Bureau report shows overall retail sales have declined slightly in February and March from what they were in January.  Looking at the detail shows auto sales declined the most.  Auto purchases are a mixture of luxury and necessity, but they're more postponable than basic necessities.  When income growth slows, consumers put off auto purchases if they can.

Andrew, Pete...Help me out here.

When Wal-Mart this week reported a better-than-expected 3.2 percent increase in same-store sales, many on Wall Street said it was a sign that consumer spending was picking up.

That doesn't seem right to me.

My impression is that Wal-Mart is the shopping equivalent of what economist's call an "inferior good."  This is not a qualitative comment on the store or what it sells but rather an economic observation: people are more likely to shop more often at discounters like Wal-Mart when times are tough and they're watching their pennies.

(ironically, the example that was used when I first learned the inferior goods concept was that consumers would shift from meat to potatoes and rice when their income fell.  In light of the current increase in the price of rice, my guess is that it's no longer included on this list.)