Wal-Mart Stores Inc. and Cisco Systems Inc., two market bellwethers that operate in disparate parts of the economy, have posted lower-than-expected results that send disturbing signals about the state of the U.S. and global recovery.
Retail giant Wal-Mart has long been a key barometer of U.S. economic health as the largest private-sector employer and a huge buyer and seller of consumer goods. In leaner times, the company has typically managed to produce enviable numbers by drawing throngs of low- and middle-income shoppers to its discount prices.
By its own calculations, Wal-Mart accounted for about 18 per cent of the $80-billion (U.S.) in federal food-stamp spending last year. But poverty isn't paying off like it used to. A slew of dollar-store competitors have cropped up to battle for market share, and a combination of expiring stimulus measures and higher taxes are forcing consumers to further tighten their belts. For instance, the monthly food-stamp aid, formally known as the Supplemental Nutrition Assistance Program, which reaches close to 50 million poor Americans, is being reduced by $5-billion this fiscal year. That amounts to $36 less a month for a family of four receiving the maximum benefit. At current spending levels, it translates into a hit to Wal-Mart of just under $6.50 per family.
On Thursday, the retailer reduced its forecast annual profit for the second time in three months after posting lower same-store sales for the third quarter in a row. And it expects sales for the crucial holiday shopping season to be flat, despite plans for aggressive price cutting. Those falling consumer-confidence levels are starting to bite at the retail level.
Not every major U.S. retailer is feeling the pinch. And Wal-Mart has had growing pains in China and Brazil that have affected overall results, although international sales still rose 4.1 per cent, excluding currency effects. But no other retailer has the same sort of broad economic impact whenever it suffers from a case of hiccups. Slower sales growth inevitably triggers ripple effects along its vast supply chain. The company has already reduced orders to maintain tight inventory levels.
Tech heavyweight Cisco Systems also has headaches in China, although of a different nature. The company, which warns that revenue will decline as much as 10 per cent this quarter and keep shrinking until mid-2014, cites, among other causes, an adverse reaction in China to the stunning disclosures of secret U.S. surveillance activities. The Chinese do plenty of their own spying, so it's sort of the pot calling the kettle black. What's really at play, though, is China's efforts to buttress its main telecom equipment rival to Cisco, Huawei Technologies Co Ltd., whose efforts to crack the U.S. market have not been welcomed with open arms by Washington.
Cisco is facing stiff headwinds in other emerging markets as well, noting that orders fell by 18 per cent in the first quarter in China, India and Mexico, 30 per cent in Russia and 25 per cent in Brazil. Spending by big telecom providers and other major corporations in Europe is also under pressure.
Neither profitable company is in need of a tag day. But taken together, their direction is not what the more bullish prognosticators – or most investors – were counting on at this stage of the global recovery.