Are Consumers Freaking Out?

Times get tough in the world of retail when consumers find themselves strapped for cash. Right now, it seems that shoppers are reining in their spending, as rising costs and the housing crisis leave them feeling a lot less confident.

Last week, the RBC Consumer Confidence Index dropped 20%, plummeted to 71.1 in September from 89.3 in August. Clearly, the public's become saturated with a steady barrage of negative news about housing woes and crunched credit. Worse yet, oil prices have been on the rise again, hitting record highs last week as futures rose more than $80 a barrel. Average consumers are certainly feeling some financial pain right now.

Of course, the results of the index were based on a mere 1,000 consumers, and the margin of error was around 3%. But the index is not the only indicator of consumers' increasing stress, since same-stores sales haven't been too impressive, either. Back-to-school shopping boosted August results, but some companies still experienced sluggish results, mainly stores that target lower-income consumers such as Family Dollar (NYSE: FDO).

The weak economy has been retailers' top excuse in their most recent quarterly earnings releases. Higher inventory levels, coupled with slowing sales, caused companies to mark down items more than usual. Companies like Tween Brands (NYSE: TWB) and Citi Trends (Nasdaq: CTRN) are bogged down with unsold goods, crippling their margins.

While McDonald's (NYSE: MCD) is still churning out burgers and fries at a breakneck pace, other restaurateurs are struggling. Brinker (NYSE: EAT) recently proved that it isn't time to dine on its stock, and some are wondering whether Ruby Tuesday (NYSE: RT) will ever shine again.

Of course, one number doesn't make a trend. But if consumers, who make up a large part of our overall economic activity, are getting edgy, this week's likely decision by the Fed to lower the federal funds rate should probably help ease retailer concerns. Some believe that a rate cut would cause additional inflationary pressures, but to me, it seems like the lesser of two evils.

I'll be interested to see what Bernanke decides tomorrow. His decision will certainly affect both the market and consumer trends in the near future. I just hope he remembers that if retailers and restaurants begin to run out of steam, it'll be tough for the economy to keep on chugging.