Retail crash: Consumers cut back on nearly everything

The government’s report today on December retail sales is a disaster, and the stock market is reacting in kind, with a blistering sell-off. The Dow industrials were down 253 points, 3%, to 8,195 at about 10:40 a.m. PST.

The headline retail sales number was bad enough: a 2.7% drop last month from November’s level, more than twice what analysts were expecting. It was the sixth straight monthly decline.

But the numbers were worse under the surface: Of the 19 retail subsectors tracked by the Commerce Department, 17 showed a drop in sales last month, seasonally adjusted. Consumers were cutting back on nearly everything, even as retailers were drastically marking down prices.

Some of the declines by retail sector:

-- Building materials/garden supplies: -2.9%

-- Department stores: -2.3%

-- Restaurants and bars: -2.2%

-- Online retailers: -1.9%

-- Furniture and home furnishings: -1.8%

-- Grocery stores: -1.3%

-- Electronics and appliances: -1.0%

-- Sports/hobby/book/music stores: -0.4%

"Consumers are so worried about income security and so shellshocked by the destruction of their wealth, they have simply shut down spending and shifted into survival mode," wrote Bernard Baumohl, chief global economist at Economic Outlook Group in Princeton Junction, N.J., in a report today.

"The priority in this instance is for households to preserve whatever income they receive and whatever savings is left," he said. "It is symptomatic of a catastrophic collapse in confidence among households who fear that even if Washington proceeds with a trillion dollar economic stimulus program, it will not have much of an impact on reviving jobs and income this year."

The only two retail categories that saw rising sales last month: the "miscellaneous" sector, up 0.5%; and drug stores and other health and personal care stores, up 0.4%.

"We can only speculate that the worst economic downturn since World War II has caused many stressed out Americans to [visit] neighborhood drug stores for aspirins and stomach remedies," Baumohl said.

He meant it as a joke, but it probably isn’t.

-- Tom Petruno

Photo: Sales banners at an H&M store in San Francisco. Credit: Justin Sullivan/Getty Images

Comments

[Dan]

Really, any business that cannot handle a sales drop of less than 3% is a very badly run business indeed. A 3% drop is barely noticeable in the overall scheme of things.

I am surprised the drop was not a lot larger.

Sales are down to the level of 2005. Consider that 2005 was a record high year. We thought life was pretty good then. So please, let's keep things in perspective.

[Tom Petruno]

@Dan: It's the trend that is the killer here: Retail sales now have fallen month-to-month for six straight months. See the chart with this story:

http://www.latimes.com/business/la-fi-retail15-2009jan15,0,1832589.story

Monthly sales are down more than 10% since June. That's why retailers are lined up outside the bankruptcy courts.

Tom Petruno

[Richard]

I completely agree with Dan's posting on this. In addition, economists have been mentioning a fear factor among the general public as another oppressive factor in holding the economy down. And this sense of fear is very much fueled by the media. Essentially, the more we're told that the economy is shot and the doomsayers harp on negative trends, real or imagined, the more we panic and cling to our pennies. Is there no respite from the constant hammering?

[citizen]

Most Americans already have at least one of everything they need. What's being curtailed is their (or the advertising industry's) push to buy what they "want" or want to "upgrade." This shows that we can all get along with very little buying for a long time.

[Will]

These numbers are not bad. Its a return to normal spending. In the past few years Americans have been overspending. Americans have been scared straight into actually saving their money.

Yes, I know, its sucks for the retailers who have been enjoying the ride. But for America at large, this is a good development.

[Chrismt62]

These numbers only tell part of the story. What I want to see published is "activity" rather than simply dollars. Are people buying fewer items overall or shifting toward buying lower priced items or items heavily discounted? If people truly have stayed away from the stores I think the numbers would be much worse than this.

[Tom Petruno]

Of course people are trading down in their purchases. But I'm amazed that anyone would think these retail sales numbers are not all that bad.

Again, we're talking about the sixth straight monthly decline -- not just a one-off event for December.

Compared with a year ago, total retail sales in December were down 9.8% from a year earlier. You don't see that kind of decline simply from people "trading down."

And you wouldn't be seeing the current wave of retailer bankruptcies if sales were just "not bad."

It WILL be a healthy thing for the U.S. economy, in the long run, if people consume less and save more. But at the moment, consumers' closed wallets are deepening an already severe recession. You can't sugar-coat that.

Tom Petruno

Tom Petruno

[JS]

Tom - it would be interesting to know if this is driven by credit restriction as much as frugality. One suggests those that couldn't afford, but spent anyway, are now unable. The other suggests those that can are either saving, or holding back in anticipation of greater discounting. Either way, retailers will suffer, and it's likely some of both.

The other shoe, in this case, could be the retail strip centers built as fast as housing in Inland Empire towns, which will no longer have any tenant cash to support the mortgage, as their anchor tenants shut down.

Then once these centers begin to default.....

Not an entirely unpredictable consequence to anyone who has lived through a property boom & bust before. Those that ignore history are doomed to repeat it.

[tony.daysog]

Don't forget, most retailers - including Wal-Mart - operate on slim margins. They may have fixed costs that they can't unload in step with declining sales (i.e. debt, rent, labor, products purchased ahead of time), resulting in lower, if not negative profits for the quarter or year.

[Joel]

Tom, I have a question for you because I'm trying to get my head around this, I really am, but I'm having some difficulty. Retail spending is down almost 10% over the past year. I got that. But why is it doing such a horrific job on retailers? My personal spending has been cut more than that in the past year and my situation is fine. Why are the retailers having such a hard time adjusting downward? Is it, as outlined by tony.daysog in a posting, that retailers spend that much time that close to the edge? Why wouldn't a retailer have some kind of back up to help out in down times? I'm not trying to appear dense here but I just don't understand...we're coming off a retail boom that lasted, literally, decades...why are these companies so undercapitalized that they tetter on the edge of ruin? I really want to get this clear. Thanks!
Peace

[Tom Petruno]

Responses to JS and Joel:

I'm sure you're right, JS -- there are many people who would LIKE to spend but they can't get credit. As for the fallout on commercial real estate loans: I think that is the biggest banking crisis to come in 2009.

Joel: Yes, tony.daysog is right: Many retailers operate on slim margins. After six months of falling sales, those that had no capital cushions are simply calling it quits. Either that, or their lenders are forcing the decision on them by refusing to extend any more credit for inventory financing or other needs.

This is Darwinism in the extreme: Survival of the fittest. And once the shakeout is over, many of the remaining public retailers could be great investments. But that's on the far horizon.

Tom Petruno

[Mr.Bilko]

I hate to spoil all the fun Tom Petruno is having here but it isn't just that consumers are cutting back or not spending. The number of unemployed in California went from 1.08 mil in Jan'08 to 1.53 mil in Oct'08. (see: http://data.bls.gov/cgi-bin/surveymost?la ). Median wages for a male is $3800/month, a female is $2900/month. Assuming that unemployment benefits come in around $1500/month, it does not take a rocket scientist to see why retail is cratering.

Unemployment is expected to hit at least 9% nationally this spring. As unemployment rises, retail sales will continue to decline. It would be prudent for the Fed, economists and business writers to factor rising unemployment into the declining retail sales figures. We should expect retail sales to continue to slide until the employment situation stabilizes.

[Tom Petruno]

@Mr. Bilko: Why would you assume from the post that my point on consumers cutting back would exclude people who MUST cut back because they've lost their jobs?

Of course they're part of the reason for the plunge in retail sales.

Tom Petruno