Consumer Credit and Savings: Heart of the Crunch for Retailers

A sense of “poorness” is becoming more and more relevant to the average American as the degrees of separation between those with jobs and those without is shrinking. While many US consumers remain employed, wages and hours are declining and further dragging down buying power.

It is during trying times that consumers turn to credit as a means of maintaining their lifestyle and spending patterns. However, the economic downturn of late has made this lifeline less appealing and more socially unacceptable. Outstanding consumer credit made an abrupt reversal in February, down by $7.4 billion compared to the revised $8.1 billion in additional credit reported for January. Personal savings rates have risen dramatically as individuals fear they will need a reserve of cash on their balance sheets in the face of potential income losses.

As personal savings has risen simultaneous to a decline in outstanding credit, the ability of consumers to purchase goods is rapidly declining. As a result retail sales have subsequently fallen over the past year, forcing retailers to cut costs and reduce profits in order to remain viable.

Retail sales numbers for the Q1 2009 earnings season will be dismal and reflect the harsh reality facing consumers and firms alike. It will be the language and not the numbers that will move retail stocks, as forward looking statements from industry leaders paint the landscape for the sector moving ahead.

To capitalize on retail stocks declining, get long SCC (Proshares Ultra Short Dow Consumer Services Index).

Disclosure: Long SCC

Comments

[SIEANDME:]

So let me understand this. The consumer is paying off creditcard debt at a record pace and at the same time building up a nest egg in a savings account. Does that mean when the economy begins to recover and consumer confidence begins to rise that all this available credit and cash sitting on the side line will be fuel to futher the expansion of that recovery?

Is it possible that America will recover?

Apr 12 06:24 AM

[SIEANDME:]

Pssst, This recovery is will be explosive and will catch the best of the best by surprise.

Apr 12 06:33 AM

[TraderRob:]

You are essentially proving my point. It isn't that people are just as wealthy as they previously were and are simply gaining some financial wisdom on a whim. There are three types of consumers out there right now. The first consumer has a job and access to credit, the second has a job and is having his credit cut, while the third has no job and is facing collectors.

The U.S. economy has been fueled by the consumer bearing over 70% of GDP during leading into this recessions, and it is foolish to expect that during times of recession the average person is able to save more and pay off credit card bills. If your argument holds true, you would essentially be claiming that the recession that we are experiencing is "all in our heads" and we just need to go spend. Of course a large part of any "economic winter" is psychological, but firms and consumers are REALLY suffering.

The savings rate is increasing as those who can't get credit for big ticket purchases (i.e. houses, cars, appliances) aren't buying, and those with cash aren't spending it for fear that they will lose their jobs. If unemployment comes crashing back to 4.5% I might buy your argument, but allowing for a continued rise in jobless claims, it just can't work.


On Apr 12 06:24 AM SIEANDME wrote:

> So let me understand this. The consumer is paying off creditcard
> debt at a record pace and at the same time building up a nest egg
> in a savings account. Does that mean when the economy begins to recover
> and consumer confidence begins to rise that all this available credit
> and cash sitting on the side line will be fuel to futher the expansion
> of that recovery?
>
> Is it possible that America will recover?

Apr 13 11:04 AM