Most economists expect the refinance boom to stimulate consumer spending, especially during the critical holiday shopping season. Part of the theory includes the four to six-week lag time from when applications are submitted to when the loans are actually refinanced. Since refinancing peaked in September, economists forecast holiday sales will benefit. One wrinkle in this theory is that the refinancing boom started in July and was very strong in August. That means October retail sales should have had the extra stimulus economists are expecting. The retail sales data that was released last week did not show a very strong consumer that would be expected if there was a meaningful impact from refinancing. Retail activity was not bad, up 5.1% year-over-year excluding autos and food, but less than would be expected if refinancing effect was kicking in. Especially considering that last year's comparison is relatively easy. Last year, so much of the added consumption was driven by auto sales. Year-over-year auto sales declined over 14% in October, while total retail sales only dropped 0.7% compared to last year. While it might seem like a mixed message, October retail sales were healthy, but not indicative of refinancing stimulus. Even more problematic scenario, and highly likely, is that refinancing activity has boosted consumer consumption and the underlying spending is far weaker than is being depicted.

Excluding food and auto sales, October retail sales increased at the fastest year-over-year rate since January 2001. Obviously, the easy comparison from last year helped, but it does show consumers have yet to retrench in a meaningful way. While consumers have only marginally reduced spending, it is worrisome that so many retailers are reporting disappointing results.

The week started with Wal-Mart announcing that its same store sales for November would be at low end of the guided range of 2% to 4%. This is the fourth month in the past five that Wal-Mart announced sales will come on the low end of guidance. Federated Department Stores announced that its same store sales will fall 2.5% to 4.5% in November and may be anywhere between plus 1% to down 2% in December.

These lackluster results are more due to the expansion of stores as opposed to slowing spending. Total sales are increasing at a respectable rate. Long-time readers will remember a basket of retailers I created to monitor overall sales of the big retailers. The basket includes 22 retailers that report monthly sales of over $100 million. There are a few more retailers that fit the criteria, but I have kept the original list for comparisons over time. After posting year-over-year growth of about 7.5% since July, October's total sales growth jumped to 8.6%. It is important to remember that Wal-Mart truly is the dominate player in retailing. Of the combined $38 billion in monthly sales these 22 retailers represent, almost half ($18.5 billion) came from Wal-Mart. We know a slowdown in consumer spending is unavoidable. The mortgage finance boom has not only delayed the inevitable, but has probably magnified the damage. Usually the household balance sheet is not as strong after a refinancing, especially now with lenders pushing to include closing costs in the loan and the high amount of equity extraction taking place.

The retailing giant Wal-Mart provides an excellent example of growth coming mainly from new store growth. During the third quarter, sales increased 11.5% from last year, while its same store sales only rose 3.5%. When analyzing retailers same store sales growth is very important, but total sales are the key measure to use when looking at the macroeconomic picture. The fact that Wal-Mart grew revenue by over $6 billion during the third quarter should be an indication that consumers are lightening their wallets. Same store sales can often signal important turning points, as they are much more sensitive to the economy. It's likely that we are now at the turning point in retail sales.

Retailing is a very competitive industry. Just ask Home Depot, which is losing market share to rapidly expanding Lowe's. This week Lowe's announced same store sales rose 4.1% during the third quarter and are expected to increase 4% in the fourth quarter. Home Depot reported same store sales declined 2% from the year ago period and will fall by 3% to 5% during the fourth quarter. The ever-expanding Home Depot said that it had cannibalized 22% of is stores in the third quarter, which hurt same store sales by 4%. The 8.5% increase in total sales during the third quarter was the lowest growth in over 12 years. The thorn in Home Depot has been Lowe's wish has increased its debt by $1 billion in each of its last two years to fund its growth. Lowe's typifies the aggressive expansion retailer. During the late 1990s, retailers were in an "arms race" to capture market share. Now the retail landscape is littered with stores that are having a difficult time even with a minor slowdown in spending.

We are starting to see some retailers curtail their aggressive expansion plans. Home Depot, Best Buy and McDonald's are a few of the large retailers that have recently announced a reduction in new stores. The retail sector will need a shake out similar to what is happening in technology and telecom. Anyone thinking this will happen soon needs to remember K-mart is still operating and Ames finally ceased operations eleven years after its first bankruptcy filing.

Watching the retailing sector is important right now since so much is riding on the consumer. Investors are not counting on a rebound in corporate spending happening soon, and hope the consumer can keep it together just a little bit longer. They might be able to, but it will be at a cost to the household balance sheet that is already suffering from too much debt. Any more over-consumption will only make matters worse down the road. The punchbowl of credit needed to be taken away a long time ago.

During the past several years, consumers have been living beyond their income. This has been financed through lower savings rate, record amount of borrowing, and home equity extraction. With residential real estate starting to show cracks, the last source of liquidity is fading away. Consumers are realizing that they need to save more and pare down debt. The effects of this change will be significant. If a consumer is not saving and spending 5% more than his income, consumption is 105% of their income. Now, if savings moves to 5% and another 5% is allocated to pare down debt, consumption drops to 90% of income, or a 15% swing from the amount previously being used to propel the economy.