Will Santa Sleep Through Christmas?

RAPAPORT... Economics is often referred to as the dismal science. Perhaps, that nickname should be changed to the dismal art. When it comes to interpreting data, the past year has shown us that the process can be more subjective than scientific — more art than science.

Two years ago, even the top boss of the U.S. Treasury, Henry Paulson, was singing the praises of the robust economy. Only the rogue forecaster was pessimistic. Early this year, it was difficult to find an economist who wasn’t on the doomsday bus. In both cases, the pundits missed what was really happening.

Mid-September’s surprising news that back-to-school sales were more robust than virtually anyone had predicted could be a harbinger for this year’s make-or-break holiday shopping period. Auto sales spurred by the cash-for-clunkers program helped push August’s retail sales figure to its best level in three years. But a quick dive deeper into the numbers reveals the presence of healthy apparel, sporting goods and general merchandise sales as well. What all those numbers show is a more confident consumer, one who thinks the worst is over and who may be willing to tiptoe back to the mall.

Pent-up Demand
It may have been the aftershocks from the financial crisis that sent the North American consumer into hibernation. The failures of AIG and Lehman Brothers in September of 2008 were big. The massive point drop in the stock market and the “breaking of the buck” in money market funds added to the fear, but it was the continued unraveling of stock prices for the next six months— until March — that painted pictures of the Great Depression in consumers’ minds. With no end in sight, there was every reason not to spend. Even if your job was secure, your nest egg was not.

The strength of the bull-run in stocks this summer told those who had been stuffing cash into their mattresses that the panic was overdone. That news was just what many Americans were waiting for. Joel Naroff, president of Naroff Economic Advisors, says the August numbers are the first step in the spending recovery process. “People start coming out of their shell by buying the little things that make them happy. This is the first real sign that households are starting to loosen their wallets.”

Naroff says the next important step will be consistency in big-ticket appliance and electronics sales, which were also good in August, but terrible in July. “If we get a second consecutive month of good increases in appliances and electronics, then I would be pretty much convinced that spending is on the way back and that the holiday shopping season may be better than expected. It is still not projected to be strong, but a disaster no longer looks to be in the cards.”

Looking ahead to the holidays, Sony Electronics’ Executive Vice President Mike Fasulo told a media gathering in San Francisco in September that he is hopeful about the holidays. “I’m cautiously optimistic about holiday retail sales. Though I’m cautious about saying I’m cautiously optimistic,” he said. More broadly, he said retailers also have “some notion this will be a better holiday” than 2008.

The cautious part of the optimism will keep the number of new holiday hires down. John Challenger, chief executive officer (CEO) of outplacement firm Challenger, Gray & Christmas, says, “With millions of Americans out of work and many more simply cutting back on all discretionary spending, few retailers will take the risk of eating into slim profits with extra workers.” He adds, “The good news for retailers is that if there is a need for late hiring, the labor pool is flush with qualified candidates who undoubtedly would be eager to earn some extra holiday spending money and take advantage of employee discounts.” The flip side of that is the longer the wait to hire, the less those workers will spend.

The Shape of Recovery
The shape of the recovery has been likened to everything from a hockey stick to an out-of-control EKG chart. It is hard to plan for hiring or inventory buildup with the future so fuzzy. The U.S.’s top economist, Federal Reserve Chief Ben Bernanke, says he believes the recession is over, even though the job market remains terrible, but admits “it’s still going to feel like a very weak economy for some time…. Unemployment will be slow to come down.”
 
Predictions that the jobless rate will hit 10 percent remain. Prospects of a jobless recovery have heightened concerns about a double-dip recession, where a recovery late in 2009 falls back into recession in 2010. Bernanke’s Fed is trying to head off a double-dip or “W” recovery by repeatedly saying interest rates will remain low for the foreseeable future. While other forms of life support are slowly being removed by the Fed, the low interest rate policy will remain — at least for now.

Naroff doesn’t see a move up in rates until the mid-December or late-January Federal Reserve policy meetings. “Once they start raising rates, watch out. They are likely to proceed at a rapid pace,” he says.  

Consumers Trading Up?
Headwinds for retailers still exist. Need-based buying remains the rule of the day as consumers de-leverage their household balance sheets and increase their savings rate. But savvy consumers have noticed that it doesn’t always pay to trade down. There has been more price deflation in the luxury brand segment than in the middle or lower-end brands. Shoppers are looking for value that goes beyond price alone. Quality and convenience factor in, too. A year after the crisis began, retailers have a tighter rein on inventories than a year ago. Waiting for the best price could leave shoppers empty-handed this season and they know it.

As signs of recovery begin to appear, it makes sense to view the turnaround not as a W or a V, but with a critical eye. This recovery has many moving parts and, to understand it, just as with a great work of art, it is necessary to appreciate the nuances. The businesses that see the subtleties will have the right inventory at the right price and the right levels to meet the needs of consumers who are testing the waters. Those who don’t may not be around for the next round of recession and recovery.

Article from the Rapaport Magazine - October 2009. To subscribe click here.