Morgan Stanley cuts retail sales outlook

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Morgan Stanley on Friday cut its forecast for retail sales growth in 2008, saying that the current "turmoil" in the credit markets will lead to declines in consumer wealth and available credit as
well as more modest job growth in the U.S.

Analyst Gregory Melich said despite an improvement this summer, he now expects retail sales to grow 3 percent in 2008, down from a previous forecast of 4.5 percent, which would put
growth at its lowest level since 2003.

"Household wealth, credit availability, and jobs growth are key lead components of retail sales," Melich wrote. "We are baking deceleration in each of these areas."

Consumers have proven resilient in their spending even as prices for gasoline and food remain
high and housing prices decline in parts of the country. Earlier this month, the Commerce
Department said retail sales rose 0.3 percent in July, in a report that showed strength in a wide array of areas outside of the struggling auto sector.

Melich, however, expects that a decline in household assets will hurt spending next year.
Apparel, consumer electronics and home improvement sectors are particularly at risk, the analyst said.

Melich encouraged investors to focus on companies that have the ability to increase earnings in a "decelerating market."

He named Wal-Mart Stores Inc., Target Corp., CVS/Caremark Corp., J.C. Penney Co., Coach Inc., Staples Inc., O Reilly Automotive Inc. and Safeway Inc.

JKL

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