Location, Location or No Location At All
contributed by Charles Lemos
It is the first quarter of the year and that’s generally a bad time for retailers. Sales are softer than in the rest of the year with weather, a paucity of event-centered sales event and the hangover from the buoyant end-of-year consumption binge. While the retail data for the F108 won’t be out until mid-April, it doesn’t look good and that spells trouble for the economy overall given that demand from consumers accounts for approximately 70% of U.S. gross domestic product, consumer services as a whole produced by private industry accounted for 67.8% of U.S. gross domestic product in 2006.
Retail sales in 2008 year-to-date (YTD) have been sluggish. According to the Federal Reserve last week “Economic growth has slowed since the beginning of the year” Two-thirds of the Fed's 12 regions "cited softening or weakening in the pace of business activity, while the others referred to subdued, slow or modest growth," the Fed said. "Reports on retail spending were generally downbeat," the Fed said. The Fed said that retailers in a majority of regions described sales as "below plan, downbeat, weak or having softened." Clothing sales, for instance, were reported as soft in the regions of New York and Philadelphia and Richmond, Va. Several regions noted declines in sales of "big ticket" goods and home-related items, the Fed said. Auto sales nationwide were characterized as slow or sluggish, the Fed said.
Sagging sales means big trouble for retailers, especially for small retailers, who are unable to cut costs. And so they shutter windows and close their doors. That in turn lifts the unemployment rate furthering dampening consumption. A report by International Council of Shopping Centers released this week forecast that 2008 will see the largest closure of mall-based retail outlets since 2004. Their estimate is a loss of 5,770 stores across America’s malls. On Main Street USA, it is likely to be even more brutal.
The chains are struggling and they are generally in the best position to cut costs. Ann Taylor (DJIA: ANN), Talbots Inc. (DJIA: TLB) and Pacific Sunwear of California (Nasdaq: PSUN) have already closed hundreds of stores this year. At the end of February came news that San Francisco-based Sharper Image (Nasdaq: SHRP) is filing for Chapter 11 bankruptcy protection. Their proposal is shut half of their 184 stores. Wilson’s Leather Goods is going out of business and even those not closing their doors are having massive sales of up to 70% in an effort to spur sales. And 2007 was a hard year with over 4,000 mall stores closings. Home furniture & furnishings is taking the biggest hit with 1,228 store closing in. Home entertainment (consumer electronics) saw 1,087 store closings. There were 542 apparel stores that closed and 286 bookstores that shut their doors. Even drugstores were not immune with 398 store closings.
The small business share of GDP has held virtually constant from 1998 through 2004 starting at 50.5% in 1988, reaching 49.9 percent in 2000 then rising to 50.7 percent in 2004. So when it aches, we all feel the pain. On Main Street USA, I can offer only anecdotal evidence so far. A card & novelty business on Market Street here in San Francisco has seen its sales fall by over $10,000 a month. A music retailer saw its sales fall 20% in 2007 and now another 40% so far in 2008. A restaurant owner tells me his customers are trading down, ordering more tacos, fewer burritos. They cannot cut costs and so it might mean shutting their doors. No location at all.
Of course, the greatest location of all is one’s home and here the problem is growing day-by-day much more serious. A survey by the Transamerica Center for Retirement Studies ( HYPERLINK "http://www.transamericacenter.org/resources/TCRSConfidence.pdf" pdf here) finds that the share of workers borrowing from their 401(k) retirement funds increased from 11% in 2006 to 18% in 2007. Nearly half of those taking out such loans in 2007 cited the need to pay off debt, compared to a quarter in 2006. Moreover, USA Today found that Americans aren’t just borrowing from their 401(k) retirement savings plans, they are cashing them out. That’s brutal because the tax consequences are simply onerous. All of the cash out is taxed as income and then there is a Federal penalty of 10%.
USA Today reports that “such hardship withdrawals began rising last year and, by January 2008, had exceeded January 2007 levels.” With the economic slowdown tightened pressure and the rise in mortgage rates putting the pinch on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (DJIA: MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group. So these folks, our neighbors, aren’t trying to pay off credit card debt, they are trying to save their homes. Stagnant wages and salaries, with most spouses already employed, rising health care and food costs, ever-higher gas and home heating oil prices, higher mortgage debt loads, and falling home values mean American households — including many middle-income ones — are financially strapped.
To help shore up the ailing economy, the Federal Reserve has been cutting a key interest rate since September. As the economic situation continued to falter, the Fed turned much more aggressive. It slashed rates by 1.25 percentage points in the span of just eight days in January — the biggest one-month rate reduction in a quarter century. Fed Chairman Ben Bernanke signaled last week that the central bank stands ready to lower rates again at its next meeting, March 18. Bush’s tax rebates are due in May. I wonder what effect they will have. It seems a marginal one. The economic policy solution is, of course, a political one. The need to recognize the severity of the problem and take action to stabilize markets and consider massive write-offs of hard assets and excess inventory.
I will note that when I write about politics I often take an over-the-top style but on this sobering piece, it is pretty cut and dry. That is because it means we are under the bottom despite not having hit bottom quite yet. Sobering news.
Comments
Charles: This was a very focused, thought-provoking, and admirably detailed and informative piece. Aside from being excellent in its own right, I also think it's your best yet.
Let me point out some of the things I really liked, and then voice a couple of questions I'll be mulling over. First, I really loved that you don't privilege any one sector of the economy, but give us highly effective vignettes--so to speak-- of some different sectors, explaining in outline the distinctive problems each is facing, and their respective implications. In particular, we've heard little in the news, to my knowledge, of how the recession--and after the latest Fed. report, it is by now pretty obvious that that is happening, not something we're still hoping to avoid--is affecting the middle class, other than anodyne remarks about how "they're tightening their budgets" (!!!): your discussion of 401(k) plans is sobering indeed. And you're right, that is just brutal. The U.S. is rightly focused on the short term right now, but this could also mean big problems down the road if people respond to the recession by drawing out of 401(k)s.
Second, let me draw a connection that you imply, but that I think is worth explicitly drawing out(although please feel free to correct me if by your lights this isn't quite right). The connection is that what is fueling the bankruptcies you're talking about is--in part--huge fears about risk on the part of lenders, who do not seem to be responding to the lowered rates and easier credit available to banks via the Fed by making more credit available to borrowers (such as small businesses trying to stay above water). In short, if you add that to your list of interlocking problems, it becomes clear how much we are truly eating our own tails at this point.
Now my question. I share your skepticism how much the tax rebates will do, and I agree that another part of the problem is that we haven't really faced up to some of the real difficulties yet. But what more specific actions would you think appropriate in the short term to stablize the market? I see no obvious political solution for the short-term, other than refusing to pretend any longer than things really are going pretty well.
P.S. if you haven't seen it yet, Krugman's latest covers some of the same topics you discuss, in a much more general way. See here. As an added benefit, he has an unfair one-liner about Obama at the end, and I know you will love.
I wrote earlier in another post or perhaps it was in a comment to one of my posts about riots in New Orleans over the razing of public housing and I warned then that more were on the way. And then last night I write this piece about the pain in retail and the pain in America's homes and this afternoon, we are confronted with riots in Boca Raton, Florida. Palm Beach County. My piece could not have been more timely. The pain is real and urgent. I just don't know the solution but the answer can't come through the Fed Reserve because the problem is not just a monetary one, it is a systemic economic one. Nine people have ended up in the hospital and over 600 rioted in Palm Beach County over housing vouchers that were too few in number to meet demand.
The story from the Sun-Sentinel: http://www.sun-sentinel.com/news/local/palmbeach/sfl-312vouchers,0,5039730.story
It bemuses me that they call it a "near-riot." Will it take an actual death to call it a "riot"? When will the media start reporting events as they are and not as they would like them to perhaps be? Downplaying people's fears belies the reality of a very sobering economic picture.
Adam you were brilliant to draw out the piece more and thank you for kind words. As for your question, I honestly can't think of a short-term solution. In part, I am not an economist, an economic observer yes (we all are) but also in part because this is a crisis years in the making and one born of the folly of the Bush Administration.
Charles
Oh the media and the things they don't write! Having just done a quick survey of major US-based news organizations (USA Today, CNN, ABC News, and Fox News) I could not find a word on the riots in Boca Raton. To be fair to CNN, I heard about the riots (they did call them riots unlike the Sun-Sentinel) on CNN so maybe the web will catch up with television. The Sun-Sentinel link has a video.
Charles
Post a comment