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Back-to-School Blues

You probably remember the old Staples commercials promoting back-to-school shopping that featured exuberant parents dancing along (while shopping, of course) to the Christmas song “The Most Wonderful Time of the Year.”

The ad first ran 15 years ago and has been a big success through the years, so Staplesdecided to make a new version of it this year to try to boost sales. We’re right in the middle of the back-to-school shopping season now, and early reports have not been good as consumers still appear to be hoarding their cash.

The two major events each year that give us a snapshot in the health of the consumer are the back-to-school shopping and holiday shopping seasons. They will draw even more interest this year because there is still very little evidence that people are ready to spend again.

Consumer spending must increase for the economy to see real growth. It constitutes about two-thirds of the U.S. GDP and is the fuel that powers the engine of growth. The current unwillingness of many Americans to part with their money is a big reason why so many business managers tell me that we are likely to bump along the bottom for a while longer.

Yes, corporate earnings have been better than expected this reporting season, but most of that is due to cost-cutting rather than revenue growth. The market has reacted positively, and traders I talk to believe the bias remains to the upside for the moment. However, if consumers stay cautious, there will come a point when investors will question whether the market truly reflects the underlying economic reality.

In a few more weeks, we’ll know how much Americans spent to get their kids ready for school, but unless something changes, retailers may well be singing the back-to-school blues rather than “The Most Wonderful Time of the Year.”
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