Thursday, February 23, 2023

What happens to a consumer-driven economy when consumers are tapped out?

 

In our previous discussions about inflation, we've focused on the (deliberately) erroneous figures provided by the authorities.  For example, in December the Consumer Price Index was said (officially) to be 6.5% higher than a year previously.  Those of us who use our hard-earned cash to buy what we need are fully aware that 6.5% is a laughably low estimate of the real inflation rate.  Using my earlier SWAG (scientific wild-assed guess) of multiplying the official inflation rate by 3.5 in order to arrive at approximately the real rate, that would make inflation last year plus-or-minus 23%;  and even that's low compared to Armstrong Economic's estimate of 32%.  My wallet tends to agree more and more with the latter.

This must inevitably affect our assessment of how the economy is doing.  Something like 70% of the US economy is driven by consumer expenditure.  However, when we measure what consumption expenditure is doing in real life, we have to factor inflation into the picture.  So, for example, we read that "Sales during November and December grew 5.3% year over year to $936.3 billion".  That sounds great . . . until we recall that inflation last year was officially 6.5%, and in reality several times that.  In other words, that year-on-year growth of 5.3% was a negative growth rate when compared to the buying power of the US dollar.  Consumers may have spent more, but their money bought less - in other words, fewer goods were sold.  Not much good news there.

That's also adding to the debt burden on consumers.  They no longer have enough cash in their pockets, so they're turning to credit to make up the shortfall.  "Total US household debt hit a record $16.9 trillion during the fourth quarter [last year] ... Credit card balances increased nearly 6.6% to $986 billion".  Trouble is, sooner or later those debts have to be repaid - and already-tapped-out consumers don't have the spare cash to do so anytime soon.  In response, credit card issuers are increasing their provisions for bad debt;  but such provisions eat into their profits, which means they need to claw back as much of those losses as possible . . . which in turn means they charge us more, to make more profit from those who can afford to pay.  In effect, we're subsidizing those who can't pay.  Feels good, doesn't it?

That's also why we see retailers contracting, shedding unprofitable stores and trying to build up their more profitable core business in areas where people at least have money to spend.


Retailers to Shut Down Over 800 Big-Box Stores as Inflation, Anemic Sales and Interest Rates Create Perfect Storm

Bed Bath & Beyond, Walmart, Gap, and Party City are among the big names who will be downsizing. Bath & Beyond, which narrowly escaped bankruptcy proceedings earlier this month, is the biggest loser, aiming to cut its number of stores to 480 when it once had over 1,500 locations.

Next up is homegoods outlet Tuesday Morning, which will close 265 stores as it struggles to survive through bankruptcy proceedings. Once again, California will be hardest hit, with 30 stores shutting their doors.

Macy’s, Big Lots, JCPenny, and even Amazon Fresh grocery stores also have plans to shutter locations.

CVS, Rite-Aid, Kroger, Nordstrom, and Best Buy have also been quietly culling their stores over the last several years. Another factor: many locations are closing simply because they’re not safe to operate as lax laws and woke prosecutors have turned many spots into virtual free-for-alls for organized shoplifters.


There's more at the link.

That sounds good from the retailers' point of view:  closing unprofitable stores will mean they lose less money, and can add value to more profitable areas.  However, think about it from the perspective of consumers who lose their local store.  They have to travel further to buy what they need, which is more expensive for them;  and if they don't have their own vehicle, they become more dependent on public transport, which is increasingly crime-ridden, infrequent and unreliable.  (Also, from a purely practical perspective, try managing several plastic shopping bags on a bus!  I have.  It's a losing proposition, particularly when flimsy bags break and spill your shopping all over the floor.)

There's also the security risk involved.  Local law enforcement sources tell me that of all the Walmart stores in Big(ish) City nearby, one is much worse than the others in terms of shoplifting, muggings, panhandling, etc.  What happens if that one is closed?  The thieves and muggers aren't going to go away.  No, they're going to move to where their "target market" is:  the other Walmart stores!  That's going to make the crime situation near those stores that much worse, affecting everyone in the area.  It's gotten to the point that some people in higher-crime areas will only shop at Walmart if they can order over the Internet, and collect their goods at a prearranged place and time the following day, minimizing their exposure to that risk.

And all of those consequences flow, more or less, from the fact that American consumers in general are running out of money.

Makes you think, doesn't it?

Peter


9 comments:

Old NFO said...

Out in CA with daughter, went food shopping yesterday. Half full cart of groceries (needs not fripperies) was $134 WITH her store coupons and discounts. And gas out here is $4.86/gal for regular!

Peteforester said...

"In effect, we're subsidizing those who can't pay." Back in '08 I still had a credit card. It had about $3K on it due to some emergency expenditures. I got a notice from the bank saying that my interest rate was going from 9% to 18%... just because... I called the company to ask why, and was told that they had to raise MY rates to make up for the people who were defaulting on THEIR debt! About that time, my company made its profit sharing payout directly into our accounts instead of putting it into our 401K's. It was around $3k. I paid off that credit card and cut it up. End of credit cards. End of story. Never again. Over the years I have slowly built up a cash reserve so that emergency expenditures are covered without incurring debt. This is the ONLY way to go!

James said...

I never had a credit card in my first marriage because I would still be paying that off if I did over 30 years later. Since I use them but never carry over a balance, the card companies refer to that practice as being a deadbeat.Now it looks like I will have to get rid of my Discover card after 28 years as they have decided to report retail guns sales and I won't support that.
There are large numbers of people who will be going hungry soon due to the cuts in the SMART programs and being cut off from expanding credit. If they can't feed their families of their regular income without borrowing, what will they do when they can no longer get any loans? Even loan sharks have their limits.

Michael said...

Between laws in blue cities that "Allow" open theft up to what, 700 dollars (like who stops them to add that cart(s) up for them?

And real consumers that are spending their ever-depreciating money trying to make do for this week.

Classic inflation too many dollars chasing that loaf of bread.

More stores, even Wal-Mart is closing "Unprofitable stores" and we know from the COVID Toilet Paper shortage that Blue Hive WILL drive out to smaller towns to clean them out.

Now add in that the extra money from emergency COVID EBT funding is done.

Inflation and Less Dollars for EBT.

Going to get UGLY.

My bet is the Uniparty (no difference between Dems and Repug) will make the Fed printing press go BURRRR with MOAR EBT money to calm the food riots.

AND I suspect, use the Media to shift the blame to those NASTY EVIL Horders AND GREEDY Profiteering Grocery stores when the natural result of even MOAR Money chasing that loaf of bread get even MOAR expensive.

Nothing like throwing gasoline on a bonfire. Arab Spring was for less.

Protect your families.

Anonymous said...

This is further evidence that we are in a recession.
I assume that raising prices on those who can pay is part of the plan to claim there isn't a recession - and another part of the plan to soak those who aren't working to pay for those who aren't.
I assume you have cut back on your spending; we have also, so this strategy of soaking those who can will likely backfire, especially if some stores don't do it.
As we've said, times are getting worse and they will continue to get worse for a while before they improve...

Judy said...

I mostly use the Pick-up option for shopping because I can no longer hike the big box stores. The other reason is I don't get an employee discount for being a cashier. So, not only can they wander the store to get what is on the list, but they can ring-it-up, bag it, haul it out to the car, unload the cart plus they can return the cart to the store. Just like they use to in the not too distant past. Works for me!

John V said...

One of the first financial lessons I was ever taught was to pay off the cc charges in full every month. I've done that for 57 years now. I don't even know what the interest rate is on my card. Once a year they increase my credit limit. Because of the cash back deal the card offers we try to use it for as many purchases as possible.

Anonymous said...

That’s the way to do it!

June J said...

Two years ago I was buying WinCo store brand canned vegetables for .50 a can. Today, the price is .58 a can, 16% more.

Yeah, that isn't a 6.5% increase Mr. Bidet.