Retail Sales Dynamics - May -18-09

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The dynamics of our complex economy were readily apparent last week in the contrast between April's Retail Sales Report and May's weekly same-store sales results. Like a stone left unturned, a world of activity lies hidden beneath the reported numbers, and the differing messages offered therein peaked our interest. One must wonder what drives one report to imply economic recovery while another screams of more trouble ahead. The data offers a sort of tug of war, but one that cannot remain at stalemate for long.

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According to the International Council of Shopping Centers, weekly same-store sales increased 0.5% year-to-year, marking the second such sequential improvement. This positive trend of sorts was the first of its kind in quite some time, and we took it to signify that a solid bottom had finally been reached on the retail scale.

However, April, whose flower buds still litter the trees outside our cave on the Upper East, provided news of retail sales contraction. According to the Department of Commerce, retail trade coward by 0.4% in the month of fools. So who is the true fool then, because something has clearly run amok between the two messages.

Retail Sales Dynamics

The factors driving retail sales are varied, and changes within them are grinding against one another.

The Negative

We all get the negative factors that are working against consumer spending. These are the same legitimate drivers that we've come to know well over the past few months. Notably among them, rising unemployment makes the most sense when considering what is behind tightening purse strings. The unemployment rate marked 8.9% at last check, and after a break in weekly jobless claims, the latest data showed they had bounced back upward to 637K. As unemployment continues to rise, and as the level of continuing claims shows deterioration, how can we expect a rise in spending to last? We'll get to that, but let's first look at the rest of the key drivers working against spending.

Stingy Banks

The notion of stingy banks is not paradoxical, believe it or not. Banks, having learned the lessons of loose lending, have raised standards up to above what is appropriate. More importantly for this side of the argument, they raised standards to at least where they should be, and that still means less lending. Banks now remember the risks related to gambling for profits, as loan default rates increase and repossessed assets stack up on their books.

Wealth Loss Effect

Asset values continue to deflate, specifically home prices. The value of one's home can lend to confidence; this is known as the wealth effect. One feels wealthy as their home equity increases due to price rise. However, if the value of a home deflates, sometimes to the point where one's mortgage is greater than the home value, consumers can get that sinking feeling inside. That's because they are sinking... All these factors work against consumer spending.

The Positive

The recent positive drivers working for spending are all related to the removal of psychological factors, namely fear inspired hoarding. As the working population took careful note of the job losses of friends, relatives and especially peers, they began acting prudently and protecting their own wealth. The way to best see this is to ask your friends to lend you some money now. While soft hearts shine through, you'll note some surprises as well. Self preservation rings truer than friendship to the bodily concerned (versus the soul). This is unfair to say, since many of us carry responsibility for more than just our own lives.

Recently, however, fear has been somewhat alleviated. Positive commentary from our economic leadership, namely from Ben Bernanke and his "green shoots" have been believable. Economic data points have supported statements from the Fed and Treasury, which is in stark contrast to the lip service we found in the early stages of this mess. Take away concern for the future, and the still working majority begins to spend again.

The same holds true for the banks. As the Fed and the Administration continued to pound banks with reasons to lend, the banks still held on to their money. However, as the economy has produced green shoots, banks have cautiously eased out of their holes in the ground. It should not be too long before they are lending freely again. As sure as the sun will rise, banks will eventually get greedy again and repeat mistakes if left unchecked. Also, home sales seem to be bottoming, and finally foreclosures are attracting investors who were previously cautious. People are hungry for wealth effect, and that's another good thing.

The Big Question

Who wins the tug of war? These two factors, the negative and positive, are clearly working against one another. So then, which is greater. Which factors are more important and will drive trend in retail and overall consumer spending... Well, the data seems to be saying we've reached a critical point, and reaped the benefits of fear alleviation. We now find ourselves at the point of reevaluation.

Here, investors must reconsider valuation, because their not pricing in cataclysm any longer. Every company in the world is no longer expected to evaporate into bankruptcy and their stocks reflect that. Consumer spending will rise as it benefits from fear alleviation, but it seems this factor is only going to offer a temporary lift before the steam behind it runs out. The long-term driving factor is rising unemployment, so spending should steady and possibly fall again as the psychological restraint is satisfactorily alleviated. A man can't win a tug of war against a truck forever. One of the two is destined to run out of energy sooner than the other.

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