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Thread: Target: The Canary in the Economy?

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    Jun 2006
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    Default Target: The Canary in the Economy?

    Target: The Canary in the Economy?
    July 18, 2006 (BusinessWeek)

    Many fear the slowdown in the retailer's sales is a harbinger for reduced consumer spending—and that business can't pick up the slack

    Cheap-chic retailer Target suffered a one-two punch from higher gas prices and the cooling housing market as shoppers pared down visits to the store.

    "We believe the weakening housing market and prospects of high oil and gasoline prices, along with other negatives, will during the next few quarters pressure same-store sales for Target and other retailers," A.G. Edwards analyst Robert Buchanan wrote in a research report as he downgraded Target and several other retail stocks to hold from buy (see BW Online, 5/17/06, "Could Consumers Call it Quits").

    AntiSpin: Stagflation eventually had to hit the heart of the economy, consumer spending that represents 70% of the US economy. This appears to be happening now, a good six months after energy prices and borrowing costs increased significantly while wages, except for the top 20% of wage earners, either stagnated or declined in real terms.

    The thing to keep in mind when watching the economy is that there are often long delays between changes to inputs (prices, jobs, wages, etc.) and measurable changes, often six months to a year, such as between the time energy prices increased and declining housing related wealth, cash and credit resulted in a decrease in consumer spending. That's because consumers don't behave according to the CPI, interest rate and housing price numbers reported in the financial press. They react eventually and reluctantly to the observation over time that they have less wealth than before and less money to spend. At first they compensate by increasing their borrowing, even at higher borrowing costs, in the hope that the problem is temporary. They resist changing their behavior, delay an adjustment to a lower standard of living, because that is an acknowledgement that they are in fact now poorer, a painful thing for any person to admit even if it's largely not that person's fault. Their mistake was to believe that the housing bubble "wealth" like the tech stock bubble "wealth" before it was ever real.

    Eventually consumers do admit that they are poorer, have less money to spend. If that adjustment is rapid and painful enough, consumers -- who are also voters -- begin to look for someone to blame. In times of rising gasoline prices, oil companies are always a good scapegoat. (But don't blame your local gas station. You'll notice them going out of business in your neighborhood if you haven't already. The reason is that retail sales of gasoline is a very low margin business. When gasoline prices are high, people buy less but the gas station owner is stuck paying high prices from distributors. If the station owner hasn't been watching cashflow carefully, a couple of months of slow sales can wipe him or her out. We've lost two in our area, and there is now only one station within 10 miles open on a Sunday evening.) As property taxes rise, the town's managers are also handy scapegoats, but no one was complaining about the rocketing housing prices that inspired the lavish spending plans that drove those tax increases.

    The real culprit is, of course, the policy makers responsible for the poilicies that made the US economy dependent on credit and consumption versus savings, foreign borrowing and the trade in inflated assets versus production, in the first place. Greenspan got out of Dodge last year, but the guys on Capitol Hill are sitting ducks.
    Last edited by FRED; 07-19-06 at 12:32 PM.



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