Sunday, September 14, 2014

Consumers Are Facing Protracted Weakness

Empty Wallets Make For Mostly Empty Aisles 
Almost two years ago during a television interview on Bloomberg, Harvard economist Steven Roach put a retail sales consultant in her place who was crowing about strong retail growth. Roach pointed out that after discounting for inflation growth in retail sales compared to past years is mostly an illusion. I wish he had gone to the next step and pointed out that what little growth does exist is built on a foundation of demand from huge government deficit spending. To make things worse the government has been forced to borrow much of that money. When we lookout over the landscape of retail sales today we find little has changed.

A very competitive sales environment has squeezed retailers margins. Part of the poor outlook for consumer spending comes from the inability of people to use their homes as a ATM, this abruptly ended in 2008 and was a large driver in causing the bubble to burst. While super low interest rates have allowed people to refinance homes and cut their monthly payments they have also devastated the incomes of those with savings causing them to curtail spending. Slow job creation, coupled with many of the jobs being created at the low end of the pay spectrum, is now being affected by another recent occurrence, many workers have seem their hours slashed because of Obamacare.

Absent a new stimulus package from Washington, which is not expected, consumer weakness will continue. The tailwinds from lower lower interest rates are mainly behind us. Sub-prime auto loans and doling out money to students for college can only carry us so far. As students end their educations and have to begin repaying their loans this will dampen growth and become a headwind going forward. Even a higher minimum wage during a time of rather weak job growth offers little relief. Sadly, few great options lay before us as policies poisonous to small business continue to flow out of Washington.

Bottom-line good jobs are far from plentiful, incomes are stagnate, and debt burdened consumers are out of money. Americans continue to face more deleveraging that will go on for years. Some consumers have worked hard and paid down the debt that they accumulated, others have simply walked away from their debts and taken the path of bankruptcy. Those that remain in houses where they have not paid their mortgage for months or years have supplemented discretionary spending. Roach was spot on when he predicted consumers as being in a protracted period of weakness and  you can stop talking about strong retail sales until more good jobs materialize.

Thank you for reading my post. Most economist see creating more jobs as a way out of this quagmire but this is no easy task. If you have time please read one or all of these post that focus on how difficult that tends to be;

1 comment:

  1. Bruce,
    This was a good post. However I will say that in the areas where housing prices have "recovered" there is people tapping into their equity. I am disgusted on a daily basis by "cash call" commercials. This is a direct rerun of 2007. I went to the mall today t o replace dress pants for work. I like to park in the Sears parking lot because it is covered and the least full. Walking through most of the stores everything is on sale. There is going to be no recovery until the financial leeches are removed.