Retail Sales Signal Economic Recovery Or the Bleeding Edge of the Great Recession's Next Down Cycle?

Economics / US Economy
Jul 12, 2010 - 02:24 AM

By: Adam_Lass

Is Retail the "guiding light" of the recovery – or the bleeding edge of the Great Recession's next down cycle?

"It was the best of times, it was the worst of times..."

I know it's a bit saddle-worn, but old Chas. Dickens was one heck of a student of humanity, and his opening to A Tale of Two Cities, what with its dichotomous wisdom, foolishness, belief and incredulity, just seemed too apropos to pass on today.

If you've been watching the newswires at all lately, then I imagine you are a tad cross-eyed right about now. The Service sector is supposed to be our biggest economic driver, providing some 80% of the action here in the States. And Retail is supposed to be the single biggest slice of the Service pie.

So one can only imagine the tension this week as we await several reports that are supposed to reveal how well or poorly Service and Retail are doing, especially when one considers the lousy employment news the markets had to swallow last week.

So how are these "engines of the economy" doing?

Dueling Experts

They're up – which is good! Unless of course they're not, which would be bad.

If you were to ask a supposed expert such as Federal Reserve Bank of Richmond President Jeffrey Lacker, he would tell you that consumer spending is " moderately strong," and might be expected to sustain the economic recovery.

But if you were ask Lacker's compadré the same question (and an enterprising Nikkei reporter did just that), Dallas Federal Reserve Bank President Richard Fisher would cavil that "cautious households" could be expected to "cool" growth for the rest of this year.

Confused? You ought to be.

(By the way, the editors here at Taipan Daily always try to provide our readers with analysis of confusing situations. Sign up here for our investment commentary.) http://www.marketoracle.co.uk/profit-ta ... -seo3.html

The Numbers Breakdown

On my desk in front of me are two wire service reports. One claims "U.S. Retailers Sales Rise at Fastest Pace in 4 Years." The other speaks to the "U.S Service Sector Slipping in June."

As usual, one has to dig a bit deeper to find the nuggets of truth that lie buried in the all the blather. Let's start with the second of the two, which addresses the numbers coming out of the Institute for Supply Management, a trade group composed primarily of Purchasers. http://www.ism.ws/ISMReport/?navItemNumber=4892

In May, the ISM's index tracking service-oriented companies hit its post-recession peak of 55.4. (Fifty is the index's break point, with any reading above indicating growth, while results below that benchmark read as recessionary.)

Now ISM is reporting that its June Service index figure has slid back to 53.8. While this is still barely holding on in positive territory, it does reveal a marked misstep in this index's post-recession forward march.

Dig even deeper into ISM's latest data dump, and you will find that its Employment Index did dip below the break line, dropping from 50.1 in May to 49.7 in June. Looking forward, ISM tells us that many of its pollees report that they are cutting future hiring plans.

Which End Is Up?

So how can Retail be doing so well, and yet not support its overall category? For that, we must investigate just how well Retail is doing.

There are several major reports on this topic due over transom in the next five or six days, including sales figures from Nordstrom (JWN:NYSE) and Kohl's (KSS:NYSE), as well as the Census Bureau's June Retail Trade report.

The "information" that was delivered under that oh-so-optimistic headline wasn't really fresh news at all. Rather, it was yet another trade group, the "International Council of Shopping Centers," reiterating its rosy numbers from the first five months of 2010, wherein, they note, sales "probably expanded at a monthly average rate of 4%."

Alarming Dark Spaces

As I sat to write to you today, the wire services had yet to disgorge actual June sales figures. So I thought I might ramble about the "Retail Space" and find it on my own. What I found instead was anything but heartening.

Over the next few days, you will probably hear a good bit about retail sales at existing stores – that is to say, the joints that have managed to survive the first leg of the "Great Recession." But those figures do not necessarily paint a true picture.

According to real estate data firm Reis Inc., vacancies at retail shopping centers are proliferating at an alarming rate. Reis' Q2 2010 figure rose to 10.9%, higher than Q2 2009's 10%, and approaching par with the all-time record of 11.1% back in 1990.

In other words, same store sales may very well report up. But the rise could simply be the result of consumers having markedly fewer places to shop.

Capitalizing the Next Leg

Now I must be fair and confess that I do have some interest in all these reports. First of all, I ran stores for a large portion of my working days, and even owned a piece of one for a decade or so. I can tell you for a fact that my expertise in this sector was hard won over many 80-hour weeks.

Perhaps more to the point right now, I have advised readers of my WOW column to short Kohl's (KSS:NYSE) shares, among other retailers, to the tune of some 137% gains as I sit to write. And just last week, we suggested put option contracts against the hardware chain Home Depot (HD:NYSE), which is doubly exposed to both retail and real estate headwinds.

So to be honest, I am banking more than a bit on the idea that retail is indeed leading us into the next leg of the "Great Recession."

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Source : http://www.taipanpublishinggroup.com/tp ... 70810.html

By Adam Lass
http://www.taipanpublishinggroup.com/

http://www.marketoracle.co.uk/Article21019.html