Walmart (NYSE:WMT) is the largest company in the world by revenue. When it speaks, it's worth listening to, since no other company has its finger more firmly on the pulse of the American consumer. Walmart receives nearly 10% of every dollar in non-automotive retail spending in the U.S., and it's also the country's (and the world's) largest employer, making it highly influential on the American economy as well as a useful barometer for the economy and for investors of all stripes.
In its second-quarter earnings report, out Tuesday morning, Walmart had mostly good news to share investors. Comparable sales jumped 9.3%, driven by strong performance in food and general merchandise like home improvement, sporting goods, outdoor, and electronics. Revenue rose 5.6% to $137.7 billion, topping estimates at $135.5 billion, while adjusted earnings per share jumped from $1.27 to $1.56, well ahead of the Wall Street consensus at $1.25.
Investors cheered the results, sending the stock up 6% in pre-market trading, but shares finished the session down 0.7% as one item soured investors on the report. Several times in its presentations, management noted the impact of government stimulus, saying it got a significant tailwind from federal handouts, many of which ended in July. Walmart's comparable sales slowed to around 4% in July as stimulus payments started to taper off, management said.
CEO Doug McMillon seemed to believe that government stimulus was the biggest growth driver in the quarter, saying, "My sense is that the order of things, the order of tailwinds that impacted the business were one, stimulus, two, eating at home, three, being at home, and all the things that you wanted to do to have the indoors and outdoors be more pleasurable."
Considering Walmart's size and influence on the economy, that statement could indicate that an economic slowdown, at least in consumer-facing sectors, is on its way without another stimulus bill from Congress. Other data points seem to confirm those fears.
A V-shape or a W?
The long-promised V-shaped recovery has arrived, at least in some metrics. The S&P 500 reclaimed its all-time high on the same day as Walmart reported its earnings, six months after it peaked in February before the coronavirus pandemic hit. Similarly, after plunging in March and April, retail sales in the U.S. surged through May and June, and by July, overall retail sales, including food services, had fully recovered to $536 billion, a record for a single month.
But that V-shaped recovery isn't reflective of the underlying state of the economy. The unemployment rate is still in double digits, and about 1 million Americans are filing for unemployment insurance every week, a higher rate than at any point before the pandemic. The Federal Pandemic Unemployment Compensation benefit expired last month and with it the $600 weekly checks that were going out to 20 million to 30 million out-of-work Americans.
As a result, American consumers have significantly less money to spend this month. According to data from the Treasury Department, through the first 17 days of the month, federal unemployment benefits fell from $60.8 billion in July to $29.5 billion in August. Extrapolating that data through the end of the month means that Americans will lose out on close to $60 billion, or more than 10% of monthly retail spending, assuming Congress doesn't act. Meanwhile, other funding, like the Paycheck Protection Program, is also running out, leading to layoffs and business closures.
In addition to essentials, much of that stimulus money had been spent on discretionary items like home improvement goods, smartphones, and restaurant takeout. Consumer spending drives 70% of U.S. gross domestic product, and when a retailer like Walmart says there's a clear headwind in the end of government stimulus, it's almost certainly affecting the majority of consumer-facing businesses.
Other data points show a slowdown as well. According to a report from Indeed, the world's largest job posting website, job postings in the U.S. have essentially plateaued in August after recovering in recent strongly in recent months, and last week marked the first time that the gap between job postings in 2019 and 2020 had widened since April, as job postings in the week ended Aug. 14 were 20.3% below the same week in 2019, compared to 18.1% the prior week.
Predicting what will happen with the stock market in the next few months is a fool's errand, as the volatility of the last few months have shown, but investors should take Walmart's comments on government stimulus to heart. Without another round of emergency funding from Congress, retail outlets, restaurants, and other businesses that rely on consumer spending are likely to see a significant drop in spending, and that means what appeared to be a full V-shaped recovery in both the retail sector and the stock market could be a mirage.