Costco profits warning adds to US spending fears

Costco, the US retailer, yesterday provided further evidence of weakening US consumer spending as it warned that quarterly profits would be hit by poor sales of furniture, electronics and jewellery.

The warning followed Tuesday's report from the Conference Board, which showed consumer confidence in August at its lowest level for nine months.

Yields on the 10-year US Treasury bond also slipped yesterday to their lowest levels since March - reflecting expectations of a slowdown.

Separately, the Commerce Department reported that the rate of US economic growth fell by almost half in the second quarter of this year, although it expanded faster than originally reported.

Gross domestic product grew at an annualised 2.9 per cent between April and June, higher than the earlier estimate of 2.5 per cent and largely bringing it into line with Wall Street expectations of 3 per cent growth. The economy grew at 5.6 per cent in the first quarter. The slowdown was driven in part by faltering corporate profit growth, which rose 2.1 per cent after taxes, down from 14.8 per cent growth in the first quarter, and the biggest decline in homebuilding since 1995. Overall growth was lower than in any quarter since the end of 2004.

Costco - whose warehouse clubs have 47 million members, mostly on higher income - said it had been forced to cut prices on furniture during the quarter, in response to slower sales.

Jim Sinegal, chief executive, said higher petrol prices were to blame. "Obviously it has to be a factor. We have customers at the higher end of the demographic scale and so we feel that our customers are generally influenced later than other consumers across the country. But they have to be mindful of it.

A survey published yesterday by Boston Consulting Group highlighted the far greater impact of higher fuel prices on middle and lower-income consumers, with substantial reductions in eating out, holidays and spending on entertainment and impulse purchases.

Michael Silverstein, an economist at BCG, said the results highlighted the impact on the lowest-income group of families earning less than $35,000 (€27,000) a year. But he noted that the core of families earning $50,000- $150,000 annually, who account for 66-67 per cent of consumer spending, was adjusting purchasing habits to maintain lifestyles, while worrying about the future of energy prices in particular.