Wednesday, February 3, 2016

What the retail sector says about the economy as a whole

Over the past few months we've seen how the transportation sector has contracted;  how heavy equipment sales have plummeted, revealing a decline in the sort of economic development that needs such equipment;  and how debt is crippling individuals, corporations and nations.

If one looks at how many major retailers are contracting their physical operations, it's very clear that the economy as a whole is still in dire straits, despite all those who insist it's improving.  After all, consumer spending comprises about 70% of the US economy - although precisely what such expenditure involves is open to question.  Nevertheless, when consumer spending patterns change to such an extent that overall economic activity is affected, we'd better sit up and take notice.  This is very visible at present in the retail sector.  Companies that have recently announced store closings and contraction of their bricks-and-mortar operations include:

These aren't the only closings, but they're the most recent and the highest-profile.  Each store closing affects thousands of jobs, because each employee at the stores supports other employees in other stores.  A supermarket sales clerk buys gas to get to and from her job, food for lunch every day, clothes to wear to work, and so on.  All those purchases are at least scaled back, if not eliminated, when she loses her job;  so employees in other businesses are affected by that lost expenditure.  Furthermore, property values are affected:  "In impoverished urban centers all over the nation, it is not uncommon to find entire malls that have now been completely abandoned.  It has been estimated that there is about a billion square feet of retail space sitting empty in this country...".

Some maintain that the loss of bricks-and-mortar stores does not equal loss of sales, pointing to the growth of online retailing.  For example:

Holiday sales in 2015 increased 3 percent to $626 billion compared with the previous year, according to the National Retail Federation, but online sales specifically saw the biggest growth. Online sales for the holiday season grew by 13 percent.

In apparel sales, brick-and-mortar stores saw a 5.7 percent decrease, but a 9.1 percent increase in online sales. The gains in online sales are making up for the losses in physical stores, though, especially when companies are competing with Internet giants like Amazon.

During the holidays, visits to Amazon's website about equaled the combined visits to eBay, Wal-Mart, Target and Macy's.

There's more at the link.

The problem is, when one looks at the real rate of inflation in many areas, exemplified by such sources as Shadowstats or the Chapwood Index (both of which we've mentioned here before, and which I find far more logical, rational and convincing than official sources), it's clear that much of the increased expenditure was doing nothing more than compensate for higher prices.  In fact, adjusting the numbers for true inflation (rather than the gilded, politically-correct numbers put out by the authorities), it's pretty obvious that consumer expenditure decreased significantly over the most recent Christmas season, compared to previous seasons.  If that's the case, then online retailers did no better than to hold their own against inflation, whereas brick-and-mortar retailers lost ground - some of them significantly.

On a contrasting note, I've also learned on the basis of personal experience how some (but not all) retail prices have undergone a significant deflation in recent years.  With our just-completed move to Texas, and buying replacement items for some of our older household furniture as part of the process, Miss D. and I have noted the following examples.

  • Memory foam mattresses, which used to be extremely expensive and limited to only a few suppliers, are now commonplace, and their prices have plummeted.  A queen-size 10" thick memory foam mattress used to cost upward of $2,000 from the 'name-brand' supplier in the field.  A mattress of equivalent quality can now be purchased online for well under $300, including shipping costs to our home.  Customer reviews of the newer version are even better than those for the older one, so clearly quality hasn't suffered from the lower price point.
  • I bought a top-rated office chair in 2006.  I didn't want to spend the $1,000+ it cost me, but my fused spine and nerve-damaged leg made it necessary.  Today, the same chair from the same manufacturer can be bought for approximately half as much if one shops around.

These lower prices are very welcome from our consumer point of view.  However, they point to the fact that companies manufacturing, distributing and selling these goods can't make as much money from them as they used to;  and therefore the employment they can offer will be more limited in terms of numbers of jobs, remuneration and benefits.  Furthermore, they'll spread less money around to their suppliers, and their staff will have less to spend at other businesses.  The 'knock-on effect' is considerable.

Store closings and the contraction of operations by 'brick-and-mortar' retailers aren't necessarily guaranteed to produce the results desired.

After closing nearly 600 stores in a one-year period, presumably removing the weakest locations from its footprint, sales at Sears Holdings stores that were open at least a year nonetheless slipped 8.6 percent during the third quarter.

. . .

At Aeropostale ... 84 locations were shuttered in a year's span. But same-store sales continued to tumble during the third quarter, dropping 10 percent.

. . .

Not only does closing a store result in lost sales — and often, erosion of market share to a competitor — it can be costly and complicated to exit a lease prematurely. It also removes a point of distribution for the brand, as consumers increasingly expect to be able to pick up online orders in the store.

. . .

Meanwhile, although underperforming stores may be operating at a loss, they're still contributing millions of dollars in sales each year. Macy's, for example, said the 40 stores it has closed or are on the chopping block account for roughly $375 million in annual sales. And at Finish Line, the stores it plans to close generate roughly $1 million in average annual sales.

While both retailers are optimistic that some of these revenues will be picked up by nearby locations or online ... it never ends up translating dollar to dollar. What's more, retailers who close a location lose a chance to market their brand among that consumer base, and give up a point of distribution.

Again, more at the link.

I look at all these developments and I find them very worrying.  If about 70% of the US economy is dependent on consumer expenditure, and if about 40% of economic activity is directly derived from consumer wallets, that portion of the economy appears to be still contracting, with no sign of any real improvement after adjusting for (real) inflation.



Cybrludite said...

With the memory foam prices, it might be a case of technology marching on. After all, an entry level computer used to run a bit over a grand, while there about half that, even before you factor in inflation. (And devices with similar computing power to a home machine in the early 1990s are effectively disposable now.)

fillyjonk said...

In my little town, several - like four or five - small businesses have shut their doors in the past year. This is distressing as we are pretty far from a major urban center that has much diversity of shopping. In a couple cases, I've had to go back to ordering stuff online instead of buying it locally because what I want is no longer available locally.

Even outside the who "WAGD" fears of the economy totally tanking, losing well-loved local businesses makes everyone's life a little poorer. And that's a few more jobs lost for people in retail.

SiGraybeard said...

I disagree with the widely cited "consumer spending accounts for 70% of the economy" statement, which I know you're just citing.

I think 100% of the economy comes down to consumer spending. If there's no consumer spending, there's no demand for the companies providing those goods to be in business at all. What would happen to the companies making those memory foam mattresses if NOBODY bought one? Without consumer spending there's no demand for B2B (business to business) transactions to sell machines, tools, computers, you name it, down to shipping pallets and packing tape. There's no reason for air travel to visit customers and air travel drops to 10% of its current traffic. The demand for hotel/motel space does the same. If consumers stop buying, everything shuts down. That said, consumers will always be buying to some degree.

So if consumer demand triggers the B2B demand for virtually everything, what's left? Government spending? And where does that money come from? You got it: consumer spending generating income.

raven said...

Any data denominated in dollars (or any currency for that matter)is suspect- measuring GDP in dollars , without taking inflation into account is just ridiculous. Nearly every government figure is stretched or outright falsified to produce a politically motivated end. The Unemployment data is a perfect example.

Deflation of price is the natural and desired end of genuine progress, as manufacturing methods improve. We can see it everywhere the product is relatively free from government control. The glaring exceptions to this are the areas where GovReg distorts the market.

Uncle Lar said...

All but one of the Walmart closings in Alabama were newer Express or Market stores, Walmart's attempt to penetrate the relatively saturated neighborhood grocery store market. My suspicion is that decision makers at Walmart drank too much of the administration's ink about the booming economy. And as well were responding to pressure to place stores in neighborhoods that were considered under served without realizing that such neighborhoods often represent increased overhead due to safety and liability issues.
The one super center closing was a store five miles from a newer one.
New technology always starts out at high prices in an attempt to recover development costs. Once economy of scale kicks in the market will determine the true value of the product and adjust accordingly.

Jonathan H said...

Uncle Lar is spot on - of the 154 reported Walmart closing in the US, only 12 of them are 'full size' stores, all of which (I've read) are within 10 miles of a Walmart Supercenter. Several of them, like the one closing in Washington DC, are doing very poorly and are also dealing with rising taxes and high minimum wage requirements.

Apparently, Walmart's foray into smaller stores isn't doing well and they are cutting their losses, unlike the government that keeps programs running for decades beyond when they were useful.

Javahead said...

One of the Walmart stores closing is here in San Jose. It's an older store (>20 years) that's relatively small. And it's about 6 miles by freeway from a much newer Supercenter.

I think a big driver here is that San Jose minimum wage is currently $10.30 and the City Council is looking at increasing that to $15; even if they don't do so the local minimum wage is indexed to CPI (however untrustworty) so it will increase every year that the CPI goes up. So they're closing the store with the lower sales to expenses ratio. Now the employees are entitled to a higher wage per each hour they work - if they had a job, that is. Funny how this doesn't translate to more money in their pocket.

David Lang said...

> However, they point to the fact that companies manufacturing, distributing and selling these goods can't make as much money from them as they used to;

That assumes that their costs have remained the same.

However, there are a LOT of things that have dropped in cost over the last several years. Some of them are just lower direct computer/electronics based costs, but there are also a lot of indirect benefits from these lowered costs. It's now FAR cheaper than ever before to get a lot of 'infrastructure' services (accounting, phones, etc)

Computer controlled manufacturing equipment is also far cheaper and far more reliable than ever before.

As a result, it's probably significantly cheaper to make this year's model of that chair than the one you purchased 10 years ago, even if they look the same. a halving of the production costs is not at all unreasonable.

Anonymous said...

Hi Peter,
I can give a real-world indication of how the economy is doing. I drive 55 miles one way to my job on the interstate, and have since GWB was in office. As a result, I can see a large quantity of billboards on the trip to & from work. In the time after Obama was elected, I started to see signs get old & weathered.
At time when it looked like Romney had a chance, there was a spike in new signs advertising stuff. Since then, it's gotten to the point where the signs are weathered or black, and I can count on 1 hand, the number of new signs that have gone up.
That right there shows what businesses think about the economy, because if it was doing well, there would be billboards advertising all kinds of stuff.

-- Steve

Anonymous said...

As for malls in "impoverished urban centers" closing I've had extensive personal experience with the phenomenon in the past. It's entirely the fault of the uncivilized nature of the clientele. Normal people won't tolerate exposing themselves or their families to the danger and annoyance of the uncivilized. When that "urban" mall closes and the uncivilized find a new mall on the outskirts of their area to descend on, again the civilized move on or nowadays retreat to Amazon to avoid the barbarian hordes altogether.

Another looming economic crisis is brewing in rural areas. For the past few years the profit margins on grains, corn, soybeans etc, have been razor thin or nonexistent. Huge amounts of money, many times a million dollars or more, might go through a farmer's hands but the actual profit is essentially nonexistent. Last year you lost money planting a crop. This year will likely be worse yet input prices, seed, fertility,land, equipment all keep going up. Worse yet,all those inputs you're more or less forced to buy at full retail prices while your product is sold wholesale to a very small number of agrigiants and their prices determined by speculators in Chicago and around the world. You don't even wanna know the mess livestock production is in. It's gonna be ugly there too soon.