Comprising about 65% of the United States' GDP, retail sales are extremely important part of the economy and nothing moves it more than consumer confidence. Over-stretched and underemployed, many consumers felt the burden of high debt loads and failing mortgages. However, after a few years of the "new normal," many consumers have cut spending and reduced debt. Taken as a whole, consumers finances are in a better shape and that reduction in debt could be a big boost for retail sales.

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Shrinking Balances
After the massive credit expansion that started about 10 years ago, the contraction was severe. Delinquencies, bankruptcies, and record levels of mortgage defaults, have been common place as the credit crisis took hold in late 2007. However, several reports indicate that consumer's finances have improved. According to the Federal Reserve's latest report on household debt and credit, total consumer debt is down 8% from its peak of the third quarter in 2008. The Fed report also showed that the sharp reductions of consumer's revolving credit lines have leveled off in recent months.

There are other signs that financial stress is easing for consumers. Seeing the biggest percentage increase since 1994, more than 29% of surveyed senior loan officers at banks showed that they are more willing to make consumer loans than three months earlier. Energy and gasoline prices have dropped, removing some pressure from consumers. And the Federal Reserve continues to keep interest rates near 0% and retirement account balances have moved upwards, which should help borrowers.

Consumers healing balance sheets seem to be helping the retail sector. According to the Commerce Department, sales at U.S. retailers increased 0.1% for June. Analysts had expected sales to slip by about 0.2%. When compared with June 2010, total sales at retailers are up 8.1%. Shopping malls are seeing greater traffic with Sales were higher in June.

Some Retail Therapy For a Portfolio
While there are some constraints facing consumers, including weak income growth and stubbornly high unemployment, investors may want to consider the retail and discretionary sectors as plays. Investors looking for a broad approach can combine the SPDR S&P Retail (NYSE:XRT) and Vanguard Consumer Discretionary ETF (NYSE:VCR). These funds track a wide swath of retail and discretionary stocks such as McDonald's (NYSE:MCD) and Joseph A Bank Clothiers (NASDAQ:JOSB) and should do well as spending returns.

High-end retail continues to see impressive sales with luxury leaders Nordstrom's (NYSE:JWN) and Macy's (NYSE:M) reporting better earnings and sales following the recession. In addition, high-end women's work-out apparel store Lululemon Athletica (NASDAQ:LULU) is seeing huge growth as more women are willing to shell out $98 for a pair of yoga pants.

While higher retail sales are great for the stores, it's also a blessing for the mall owners. Better sales have translated into higher rents for mall operators and shopping center re-development has helped the sector see increased productivity rates for the first time since 2007. The iShares FTSE NAREIT Retail (NYSE:RTL) tracks a basket of 29 retail focused REITs and can be used as an over-arching play. Both Simon Property Group (NYSE:SPG) and General Growth Properties (NYSE:GGP) represent the two largest American mall operators. Any of those three REITs could be great way to play increasing sales and consumer spending.

The Bottom Line
After enduring the credit crisis, many consumers are seeing the light at the end of the tunnel. With total household debt dropping and some spending pressures beginning to ease, many analysts are predicting a revived retail environment. While there are some strains still facing consumers, investors may want to consider the retail sector and funds like Retail HOLDRs (NYSE:RTH) for the rebound in spending. (In a volatile market, domestic investing can be risky. Many investors choose to look overseas for diversification - but that strategy comes with its own risks. To learn more, see The Risks Of Investing In Emerging Markets.)

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