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:

• Walmart (closing 269 stores worldwide, of which 154 are in the USA);
• Kmart (closing 'more than two dozen stores in the spring');
• J. C. Penney (closing 47 stores);
• Macy's (closing 40 stores);
• Gap (closing 175 stores);
• Finish Line (closing 'up to 150 stores by 2020').

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.

Peter