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Are Consumers Shopped Out?

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As we come off a big Black Friday and Cyber Monday, are there still legs in the retail sector?

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Because the US has struggled through a recovery with surprisingly weak job creation, Congress has extended federal unemployment benefits eight times over the past four years. But it's been more than a year since the last extension was passed, so hundreds of thousands of jobless workers have been dropping off the unemployment rolls throughout 2012. But with a number of federal unemployment assistance programs set to expire on Dec. 31, nearly everyone collecting federal unemployment assistance will see their benefits conclude at the end of the year.

While economists have debated whether the federal government's nearly unprecedented generosity has discouraged the jobless to actually find work, one point that isn't really open to debate is that those extended benefits have helped prop up consumer confidence-and thereby retailers-for some time now.

That means consumer confidence is bound to take a hit and drag down retail sales along with it. I suspect the retail picture already isn't as rosy as the huge increase in online sales might suggest.

Retailers seemed to be actively encouraging more shoppers to do their buying online this year, as many offered better deals through their websites than in their stores. Between price reductions and free shipping offers, retailers were able to make higher margins online since they didn't have to pay as much overhead to generate those sales. As these promotions roll off, retailers will see their sales roll off with them. In other words, retailers simply used Black Friday to pull more demand forward this year, while penny-pinching consumers tried to get the most bang for their buck.

Needless to say, I'm skeptical that consumer spending will remain as steady next year. If you want to play the retail sector, you should be very selective and not get sucked into the euphoria that's been pushing SDPR S&P Retail higher all year.

Editor's Note: This article was written by Benjamin Shepherd of KCI Investing

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