Lower Unemployment Might Mean Higher Revenue for Wal-Mart, Costco & Others

December 20th, 2011 by Michael Foster
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Higher unemployment hurts just about everyone in a consumer-driven economy, and the lack of jobs in the United States has been a challenge for just about everyone. Retail companies are most dependent on high employment rates and strong consumer purchasing power, which is why Wal-Mart (NYSE:WMT) and Costco (NYSE:COST) stand to benefit from sustained growth in U.S. jobs figures.

After four calamitous years for American workers, low unemployment has almost become a Shangri-La for economists and policymakers alike. The Labor Department recently released a report that showed a sudden drop in unemployment, from 9% to 8.6% in November [1]. Since November is not typically a month that shows increased employment figures, and since the growth in employment was not driven by the public sector, there is cause for optimism.

Optimism, however, has become a rare commodity. The New York Times urges caution, pointing to the unresolved European debt crisis [2]. Economists are surprised at the surge in American employment figures, considering the increasingly bleak outlook for Europe and signs that even the Chinese economy is slowing [3].

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More Signs Point to Jobs Growth

Despite the consternation of analysts, 120,000 jobs were added to the American workforce. While this figure is barely enough to keep up with population growth, other signs of a strengthening economy are appearing on the margins. Companies are hiring more temporary workers, which usually indicates that permanent positions will be created in the coming months. Jobless claims are down. Auto and retail sales are growing [4]. Credit is more readily available for small businesses and homebuyers, which should increase labor demand in retail, construction, and services sectors, while also helping large banks return to profitability.

While a stronger economy will benefit just about everyone, there are a few winners who will benefit most immediately from decreased unemployment, and their performances could become a different sort of barometer for the American economy as a whole.

The Big Retailers

With retail sales recovering from years of sluggishness [5], there is good reason to expect big box retailers across various sectors to post strong results for the current quarter. This is doubly so if a surge in employment inspires a shopping euphoria across the nation and a revived confidence in the future of the American economy as a whole.

Two retailers to look at closely will be Wal-Mart and Costco. Both offer shoppers a wide range of goods as well as small and large ticket items. Both also have a national presence and stand to benefit from new confidence in the American market.

The Upside of the Downside

At the same time, there is the possibility that November was a fluke and job growth slows or even reverses as the European crisis redoubles, causing fear in the banking sector and a sudden drop in the availability of credit. Investors would still be wise to take a closer look at both Wal-Mart and Costco, since they will appeal to penny-pinching shoppers more than pricier competitors such as Target (NYSE:TGT) or specialty retailers like Best Buy (NYSE:BBY).

Both retailers have done well since the subprime crisis and weathered high unemployment and decreased sales activity in 2011. Wal-Mart saw its stock prices grow by over 7% in 2011, Costco has grown by 20 percent. The uptick in both stocks has been steady and consistent throughout the year. Target, on the other hand, fell 12% this year.

The potential in Wal-Mart and Costco for growth both in a higher and lower employment environment makes them both worth a close look by investors, while their performance might also be an indicator of the future of the American job market.

This article was submitted as part of our Trefis Contributors program. Join our contributor network and submit a post powered by data and interactive charts.

Notes:
  1. Employment Situation Summary, BLS [↩]
  2. Signs of Hope in Jobs Report, New York Times [↩]
  3. China economy slowing, Reuters [↩]
  4. US Car Sales Accelerate in November, AFP [↩]
  5. US Retailers Meet Forecasts, New York Times [↩]