- The Washington Times - Tuesday, December 23, 2008

Recession worries have put a monumental chill on holiday sales, which are on track to be the worst in at least four decades, raising the possibility of many retail bankruptcies next year.

The slump comes as the nasty turn in the economy continued to eat away at consumer wealth and confidence, with home sales hitting a 17-year low last month and home prices falling at the fastest rate in at least 40 years. The rapid decline of home values the largest source of wealth for most consumers is contributing to the funk that is sinking holiday sales.

After a particularly slow week before Christmas, with same-store sales declining by 0.6 percent, the International Council of Shopping Centers projected that Christmas sales will drop by as much as 2 percent from last year, in the worst performance since records began in 1969. Last weekend, six in ten Americans stayed away from the stores altogether rather than shop for presents.

“There’s very little joy left for retailers this season,” said C. Britt Beemer, founder of America’s Research Group, which tracks holiday traffic in stores. Nine out of 10 consumers say they’ve finished shopping for presents, and those who still are looking are making a bee-line for discount stores rather than higher-priced department or specialty stores.

“Wal-Mart continued to dominate shopping this year,” he said, predicting a rash of financial problems for retailers in the wake of the dismal holiday season. “A number of major names, such as Macy’s, are in trouble over the long run, and we will undoubtedly see more retail bankruptcies in the New Year.”

Retailers generate close to one-quarter of their annual sales and about one-third of their profits during the holidays.

Consumers have been spooked by the loss of more than a million jobs in the past three months, a steady drumbeat of new layoff announcements from corporations, the bankruptcy or failure of major big-name businesses, plunging home prices and the sudden loss of financing through home equity loans and credit cards.

The dark clouds hanging over consumers caused the biggest drop in consumer spending 3.8 percent since 1980 in the last quarter, the Commerce Department reported Tuesday, and the rare recession for consumers is expected to continue for several more quarters to come.

“The main positive at this point appears to be the precipitous fall in gasoline prices, which is providing households with much needed purchasing power and limiting the extent of the downturn in consumer outlays even though most of the windfall is being saved, not spent,” said Stephen Stanley, economist with RBS Greenwich Capital.

While many economists say the consumer slump reflects fear of what the economy will bring next year, others say consumers are simply tapped out and taking a long-needed breather after spending at unsustainable rates for much of the decade.

“People need to get their personal finances back in order,” John Taylor, chairman of the hedge fund FX Concepts told a Reuters conference earlier this month.

Consumers fueled as much as 72 percent of economic growth earlier this decade by spending beyond their means and accumulating massive amounts of debt that must be pared down. He said consumers will take on less debt in the future and reduce their share of economic growth to a more sustainable 67 percent.

Shawn Kravetz, president of the Esplanade Capital hedge fund, expects a “deep and brutal” consumer recession that could result in one in 10 retail stores folding or going bankrupt.

“We don’t think that people have fully factored in this general level of malignancy going on for a year, 18 months, maybe two years,” he said.

Gail Cunningham, spokesperson for the National Foundation for Credit Counseling, said the problem is many consumers spent to the hilt, and did not think about saving money until they lost jobs, or heard about others losing their jobs as the economy soured this fall. Now, ironically, the urge to save rather than spend is worsening the economy’s downfall.

“Americans have proven that were great spenders and lousy savers,” she said. “But more people are waking up to the fact that having a savings account prepares them for the unknown, and theres plenty of unknown in todays economic environment.”

People also are saving more because the falling value of their homes is depleting their sense of wealth and well-being, economists say. That is a reversal of what happened earlier this decade during the housing boom, when escalating home values caused many people to stop saving altogether.

The National Association of Realtors reported Tuesday that the median price of existing homes slumped 13.2 percent from a year ago, in the steepest 12-month decline since the association began keeping records in 1968, and likely the biggest decline since the Great Depression.

The median price nationwide, which peaked at $230,000 in July 2006, landed at $181,300 last month, bringing the value down by nearly $50,000 or more than 21 percent. In the West, where foreclosed and distressed properties have proliferated, prices have plummeted more than 25 percent just in the past year.

Meanwhile, major stock indexes have fallen by as much as 45 percent since peaking in October 2007 zapping the other biggest source of wealth for Americans.

The combined loss of wealth in housing and stocks since last year totals $11 trillion, said Aaron Smith, analyst with Moody’s Economy.com.

“The financial shock and its aftermath have eroded U.S. wealth and reduced the flow of credit in the economy,” he said. “Households are increasing saving as they combat crushing declines in wealth.”

Mr. Smith estimates that consumers cut spending by 5 cents for each dollar of net worth lost a trend that not only is affecting Christmas sales but will lead to a $275 billion or 3 percent drop in consumer spending in the next two years.

And the damage is mounting. Most economists say the downturn in housing is far from over and, in fact, has been accelerating in the wake of this fall’s credit crisis.

Sales of previously owned homes plunged to a new low for this business cycle last month while new home sales hit a 17-year low. And residential investment during the third quarter plummeted at a double-digit annual rate for the 10th quarter in a row.

Brian Bethune, chief U.S. financial economist at IHS Global Insight, said the housing market is now in a vicious cycle that is feeding off of growing unemployment and weakness in the broader economy.

“The November home sales reports illustrate the ultimate risk in a situation where negative business-cycle momentum persists for an excruciating length of time,” he said.

Sales of previously owned homes fell 8.6 percent to a new cycle low rate of 4.49 million in November, the realtors group said. By comparison, in 2005 home buyers purchased more than 7 million previously owned homes.

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