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Retailers are now choking on their debt as profit margins implode and since February, retail payrolls have contracted by 81,000.
Retailers are now choking on their debt as profit margins implode and since February, retail payrolls have contracted by 81,000.

US Economy in Doldrums

Executives are being jolted by the reality that they had better follow their brick-and-mortar colleagues down the path of preemptive paring of locations that will soon be cash-flow negative and/or losing money

US Economy in Doldrums

As any market veteran can tell you, those on the sell-side are the second-to-last to concede to a slowdown in economic activity. It’s unseemly to make negative calls when a firm’s main objective is keeping its clients fully invested in risky assets; the two aims naturally conflict.
Hence the surprise when Bank of America Merrill Lynch said autos are headed for a “decisive downturn” that will trough in 2021 at around a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers are not quite as grim, also reduced its sales forecast, recognizing that the best days of the cycle have come and gone, Bloomberg commented.
The US economy is consumption-centric. Growth in the current recovery has centered on three industries that have fed through to consumption in its various forms—autos, energy and financial services. There’s something almost poetic in finance’s re-emergence, especially for those on Wall Street who’ve profited smartly from unprecedented levels of deal flow.
Have a debt problem? Solve it with more debt. And why not? This system has worked for generations; insatiable demand for debt is why interest rates have staged their historic decline.
Debt lit the fire that ignited the shale revolution. Debt put a floor under and then helped commercial real estate reach for the skies. Debt kept dying retailers alive. And debt made easier back-to-back years of record car sales.
The question so many bullish economists must answer is what debt can do for the economy in the future.

Choking on Debt
Retailers are now choking on their debt as profit margins implode. Since February, retail payrolls have contracted by 81,000. There are 4.5 million salespersons and 868,000 grocery store cashiers. Restaurants now employ 10.6 million people.
As furious as the retail righting has been, comeuppance could be even swifter for big-footprint restaurant chains. Nature dictates that many eateries will suffer as malls die. But more importantly, executives are being jolted by the reality that they had better follow their brick-and-mortar colleagues down the path of preemptive paring of locations that will soon be cash-flow negative and/or losing money. As far as this mega-sector pertains to future economic growth, it’s safe to say clouds are forming.
Adding to the angst, losses on securities backed by auto loans are piling up. Layoff announcements have followed. Thus there is pressure building under the unemployment rate, even as it recently hit this cycle’s nadir of 4.3%, the lowest since 2001.
Further evidence is becoming increasingly clear in credit card delinquencies; Experian reported the national bank card default rate rose to 3.53% in May, a four-year high. There are even nascent signs that households have begun to struggle to make their mortgage payments.

Closers Rise
More bad news for Sears Holdings: The beleaguered chain on Friday said it will shutter an additional 20 US stores, amounting to more than 260 closures so far this year.
The announcement, which deals yet another blow to the 124-year-old company, comes as retailers across the country struggle to stay relevant in an era of online shopping. Department stores such as Sears, J.C. Penney and Macy’s have been particularly hard hit as Americans look beyond the suburban shopping mall for clothing, furniture and appliances.
A day earlier, spin-off Sears Canada filed for bankruptcy protection and said it would close 59 stores and lay off nearly 3,000 workers.
Analysts, including those from credit ratings agency Moody’s, have been sounding the alarm that Sears Holdings may be headed for bankruptcy, joining more than 300 US retailers this year.
Central bank policy makers’ expectations for future growth indicate the current economic recovery will unseat the record holder, the expansion that finally flamed out in 2001 after enjoying a life of exactly 10 years. But then it is the Fed that’s the very last to capitulate, to say nothing of forecast, a slowdown in economic activity.

 

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