July Retail Sales: The Economic Storm Is Not Over

Sigh.....

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for July, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $342.3 billion, a decrease of 0.1 percent (±0.5%)* from the previous month and 8.3 percent (±0.7%) below July 2008. Total sales for the May through July 2009 period were down 9.0 percent (±0.5%) from the same period a year ago. The May to June 2009 percent change was revised from +0.6 percent (±0.5%) to +0.8 percent (±0.2%).

Let's look inside the numbers because they are far worse than anyone had expected, and in fact resulted in roughly 8 handles coming off the futures instantly on release.

The internals in the report should give everyone pause. A few highlights:

• Electronics, the "high tech will save us" meme of Cramer and the rest of Tout TV: Down sequentially (8,156 .vs. 8,275), even though this is the start of "back to school" buying of laptops and similar. It is also down from $9,554 last year, a monstrous decrease.
• Building materials, down as well, despite the so-called "better home starts", again sequentially, July from June.
• Gasoline, down despite the price of gasoline being flat to slightly up. Uh, isn't this summer vacation driving season? Ah, people aren't going out are they?
• Clothing is up a bit sequentially ($17,131 .vs. $17,027) but down huge from last year ($18,540)
• General merchandise stores, down sequentially and off about 4% from last year.
• Non-store retailers (e.g. online buying) up a bit, $24,058 .vs. $24,025) but down big from last year ($25,388)
• There was, however, one green shoot. Bars (in "food and drinking places") were up both sequentially and year/over/year.

So if the economy sucks you won't buy much, but you will go out and get drunk. Sounds rational to me.

Investment strategy?

Go long booze and bars, short everything else - including Tout TV.

Folks, I caught the shift onto credit cards for consumers in April of 2007 and warned about it. Nobody wanted to listen in 2007 or 2008 and they're sure as hell ignoring it now. The "green shoot" guys have been gushing all over themselves claiming that "the economy has bottomed" but they simply cannot answer the question that I have continually asked: where is the money going to come from?

Let's go back through the progression that I laid out and identified from the mathematics and earnings reports more than two years ago:

1. Consumer has been pulling out hundreds of billions of dollars a year to maintain their standard of living, running up credit cards and then refinancing their house to pay it off. Rinse and repeat.
2. Housing ATM slams closed in 2007 when the floor falls out of Subprime and the liar loans start to explode.
3. The credit card build is detected in the spring of 2007; I identified it at that time and started yelling about it right here in these pages.
4. The media ignores this, and claims "there will be no recession" across the board. This claim is not just made by Tout TV - Bernanke and the other "so-called" economists also ignore the data staring them in the face.
5. In 2008 the market collapses. But consumer borrowing does not; in fact, consumer credit continues to increase all the way through the meltdown last fall! This is madness but it is what Tout TV and the rest of the media have wrought - instead of cautioning in 2007, they incessantly try to pump consumption to keep "hope alive", despite the math all the way into the maw of the abyss.
6. In January 2009 consumer credit peaks. The consumer finally hits the wall right after Christmas 2008, and is forced to start paying down and defaulting his debt.

But as of today we have only erased some 3% of consumer debt obligations.

THREE PERCENT!

This is simply nowhere near enough credit available for the consumer to be able to restart the borrow-and-spend cycle. The housing ATM is still closed and will remain so for the foreseeable future. Consumers now must earn what they spend, not borrow it.

This is not about how much money banks can lend, it is whether there is any borrowing capacity and desire among consumers. The attempts by the media and government to stoke "animal spirits" among shoppers are doomed to fail because there are no jobs, there is no borrowing capacity, and there is no ability to pull forward demand - consumers officially hit the wall in JANUARY but nobody in the media will talk about it.

The argument that the S&P 500 or any other stock market is "reasonably priced" based on the 2003-2007 metrics of "reasonable", and that earnings will "greatly accelerate" (along with top line revenues) is ridiculous. Everyone wants to claim "the market is cheap." Nonsense.

We had an auto industry that was turning out 20 million units annually, it is now doing around 11 million, and this is with "Cash for Clunkers." That's approaching a fifty percent reduction. So what you say? All those people that used to make cars now are unemployed! What are they going to spend - their good looks?

We have imports down some 30% and China is reporting exports down 25%.

The "employment report" was better only because half a million people gave up and exited the workforce last month alone. That's "improvement" only in the world of government numbers, and that sort of "improvement" will continue in the coming months as well over 1 million people will exhaust their extended unemployment benefits over the next four months.

There is no spending power left in the consumer; he has hit the wall with his plastic and now is reduced to spending what he makes, which is a LOT LESS than he spent in 2007 and before.

Dick Bove has even come out and said "sell banks!" - he has finally come to my conclusion: Yes, the positive yield curve is nice, but credit costs are real and credit quality is still deteriorating. Those losses are REAL.

The so-called "economists" are either all taking mescaline or are in someone's pocket and making calls that are knowingly false. This data has been visible to all now for more than two years, yet it has been willfully and intentionally ignored. Yet irrespective of what the media wants to think you cannot get people to spend who have no money, and the result looks like this at the local shopping mall:

The consumer is out of money!

Now add to this the increase in crude oil - which inevitably translates into gasoline. Oil has doubled since the bottom on the calls for "green shoots" and similar nonsense, along with dollar depreciation.

That's a very pretty cup and handle; on a measured-move basis it projects to a price of around $110/bbl for oil. Would you like your $4 gasoline back? I hope so, because you just might get it. Later this fall and into the winter, just in time for JP Morgan (JPM) and others to sell their stockpiled heating oil (they've been leasing tankers full of the stuff - with government bailout money!) to Grandma and profit (again) from your misery.

Wake up folks. The mathematical facts are what they are. Dig inside the data releases from our government and other sources.

Do not just read headlines off CNBC and the "analysts" who are falling over themselves to "upgrade" stocks that depend on consumer spending when there is no spending power, or you will be misled and make a hideous mistake.

The economic storm is NOT over.

Comments

[j-dub:]

Wow, what a wake up call, Karl!!!
I just thank G-D that the recession is over and we are recovering.
Otherwise, it would be much, much worse ;)

Aug 13 04:41 PM

[WhoisJohnGalt:]

Yeah, you can't expect decades of consumer deficit spending to vanish in a couple of months. Hopefully the decrease in savings rate from this past month alludes to people trying to pay off their debts rather than dig their holes deeper. Then again, one shot of Kool-Aid (green shoot flavor!) and everyone is back to Costco binging on everything they can fit in their shopping carts.

Aug 13 04:59 PM

[PseudonymName:]

We all know that a correction is coming... the question is when. I have been convinced that September and October could see huge losses but I am beginning to believe that dips in September and October actually may present buying opportunities and that the correction may not materialize for 6 months or more. The worst play is the one where you are sure that you are right and have not considered that your timing may be wrong.

Aug 13 06:02 PM

[BPYHO:]

The thing that REALLY scares me is that b/c of all the hoopla about 'green shoots' when people realize that it was all just talk the sh!t is going to hit the fan..... AGAIN. I just wish we would have this inevitable correction! The most telling thing in this article was the picture of the outdoor mall and the empty courtyard. Go to the mall and look in the stores, they are EMPTY! I'm 29 and have never seen so few people in the malls as the past few months. Good article.....

Aug 13 09:10 PM

[Common Cents:]

I agree with "In January 2009 consumer credit peaks. The consumer finally hits the wall right after Christmas 2008, and is forced to start paying down and defaulting his debt." In fact, I think "the world" hit a wall at the end of 2008, and everything just stopped. Lots of fundamental reasons for this situation, but mostly I think everyone psychologically froze because the fin services industry was running around saying the world will end any day now, and the US govt was in transition with a lame-duck in power and lots of uncertainty about the new guy. So it was "logical" for everyone/thing to go into hibernation and wait for awhile . This created a 2 qtr "hole" in GDP. That situation is passed. As you indicate, the US consumer will have scars from this episode for awhile, but the hibernation period will not turn into an ice age. Even if the US consumer is cautious for awhile, the masses of people in emerging markets won't have found the "financial crisis" to really have had any impact on their their drive for a better life. Their needs will be the engine for growth. Companies which survived during the 2qtr "gap" by drastic cutbacks, will start to have easier "compares" by q4 and less pressure will be felt in corporate America.

So instead of talking about the economic storm, I'd look at things as the hibernation of the US consumer may not be over yet, but many people are out of their caves in the other 90% of the world. Global companies that will provide goods and services to these masses, will be good long term investments and will ultimately provide the jobs/confidence for the US consumer to come out of hibernation as well.

Aug 13 10:54 PM

[Perry D.:]

We're only a quarter-of-the-way through a massive inventory correction. Super-Glut:

seekingalpha.com/insta...

Aug 14 05:45 AM

[Ed Zimmer:]

Not only has the American consumer hit a wall, the airbags didn't go off, at least not until the consumer was pulled from the wreckage and left to lie on the side of the economic freeway. Then the rescuers (govt) set off the airbags to protect the car (banks).
While the govt is concerned about the banks, the consumer has been left to get better on his or her own, if they can. Now the Government wants to raise it's credit line so it can spend more. Kinda like dropping the jaws of life on the poor slob laying on the ground while propping pillows around the injured car.
Great article, good points, some food for thought. I favor buying the dips in metals because there is just way too much funny smoke and mirrors in everything else right now.

Aug 14 06:17 AM

[Luke L:]

One thing I agree with Mr. Denninger is to look past the opinion and view the facts. Core CPI has just been released and we are down 2.1% for the year. With all the talk of inflation what we are seeing is deflation. I have written previously about the possibility of having inflation and deflation at the same time. We have deflation for the things we want and inflation for the things we need. As a real estate developer, I can give you the facts of my industry which represents a large portion of the economy. We have deflation, severe deflation, no opinion just fact. Residential, commercial, retail and industrial. Debt from our market is gone. With no debt all deals are equity and equity demands a high return. Since real estate (other than residential) is sold on cap rates, if return (cap rate) increases, value goes down. Investment real estate is held mainly by high net worth individuals either directly or through investment vehicles. An investor's return in real estate is either through recurring return of disposition appreciation. Investment real estate is leveraged with debt to a high degree and small changes in value can have enormous impacts on equity. For people in real estate this recession began in January of 2007.
Back to the high net worth individuals whose income and net worth is now highly impacted by this deflation in asset values. They are the buyers of things we want. Expensive homes, cars, expensive consumer goods, etc. These are all high profit items. This sector of the economy is taking a big hit. No possibility for a recovery here and ergo we have deflation in this sector of the largest part of our economy. Deflation equals joblessness, demand destruction, capacity destruction, capital destruction and crushing debt. Now, these same people still have to eat, by gas, go to the doctor and consume the other necessities of life along with the rest of the population and here we can simultaneously have inflation. Inflation means loss of purchasing power, reduced lifestyle, joblessness, shortages, fear, etc. The two good points about inflation, diminished debt (paying back with cheaper dollars) and increased asst values do not apply in our current situation because that portion of the economy is stuck in deflation. We seem to be in a loose-loose situation and I have to agree with the author that if you look at the facts, i.e. if you look at company sales, if you look at debt availability, if you look at asset prices and mainly if you look at our leadership the only positive reality we have right now is hope.

Aug 14 09:20 AM

[jay fredric...:]

Excellent article and discussion. No where in this thread do I see anything about the psychological feeling of being wealthier than 6 months ago due to the market bounce. For those that had high quality stocks and held them, their 'wealth' has increased by 25-40% since earlier this year. maybe they are the one's out celebrating in bars and restaurants?

Aug 14 09:31 AM

[artkarl:]

As a self employed person now, and one that has worked in small manufacturing, hotels and restaurants, as well as a being a former (and maybe again) big-truck driver, all you say seems to be true.
I have seen the consumption patterns you describe, and I have numerous investments in gold and equities, and I observe the trends therein.
I live in rural WV near Wash. DC, so I witness all the economic strata in their natural behavior.
In general, it is false to carry forward any particular unchanging conception about the "country," (the U.S.) as that just holds one prisoner to an idea. And virtually everyone does this.
Rather, a thinking person needs to be open and accepting of change, as that comes in some form even when you're riding high.
After these last several decades, are you really needing to roll a hard 6?
Pretty stupid. Should have saved your money when you had money.
At funerals you hear, "how much did he leave?"
The only answer is, "all of it."

Aug 14 09:43 AM

[rsquare:]

Nice article! You left out the facts that the consumer is confronting a double kick in the economic backside! The banks are raising all the rate on cards and debt where ever possible. They are changing fixed rates to variable to 12+% above prime which come to 17% or better on funds they borrow from the fed at near zero %. The banks are lowering credit availability and in a lot of cases eliminating it altogether! Therefore the retail market (Shoppers) Have no access to funds for any possible needs short of food, if capable in that area!!

Aug 14 09:50 AM

[Alexander G...:]

Too true but that picture of the "local shopping mall" is a bit misleading... Cityplace is a bust and has been pretty empty for a long time lol!

Aug 14 12:22 PM

[buster0391:]

I should probably read someone else, other than Denninger as I agree with hime 110%. I sold calls on my one bank stock,(USB) and only hold gold stocks. Eventually, inflation must kick in due to money printing, that's a fact.

Aug 14 02:10 PM

[buster0391:]

Thats not deflation, lower house costs, that's a burst bubble fool. And if you believe gov't stats on inflation, well, thats just stupid. You keep thinking that. I'll keep buying the real thing. GOLD. The printing presses are running full speed, obama care, and oh yeah, what about abolutely no money for social security in the "lock box"? Print away.


On Aug 14 09:20 AM Luke L wrote:

> One thing I agree with Mr. Denninger is to look past the opinion
> and view the facts. Core CPI has just been released and we are down
> 2.1% for the year. With all the talk of inflation what we are seeing
> is deflation. I have written previously about the possibility of
> having inflation and deflation at the same time. We have deflation
> for the things we want and inflation for the things we need. As a
> real estate developer, I can give you the facts of my industry which
> represents a large portion of the economy. We have deflation, severe
> deflation, no opinion just fact. Residential, commercial, retail
> and industrial. Debt from our market is gone. With no debt all deals
> are equity and equity demands a high return. Since real estate (other
> than residential) is sold on cap rates, if return (cap rate) increases,
> value goes down. Investment real estate is held mainly by high net
> worth individuals either directly or through investment vehicles.
> An investor's return in real estate is either through recurring return
> of disposition appreciation. Investment real estate is leveraged
> with debt to a high degree and small changes in value can have enormous
> impacts on equity. For people in real estate this recession began
> in January of 2007.
> Back to the high net worth individuals whose income and net worth
> is now highly impacted by this deflation in asset values. They are
> the buyers of things we want. Expensive homes, cars, expensive consumer
> goods, etc. These are all high profit items. This sector of the economy
> is taking a big hit. No possibility for a recovery here and ergo
> we have deflation in this sector of the largest part of our economy.
> Deflation equals joblessness, demand destruction, capacity destruction,
> capital destruction and crushing debt. Now, these same people still
> have to eat, by gas, go to the doctor and consume the other necessities
> of life along with the rest of the population and here we can simultaneously
> have inflation. Inflation means loss of purchasing power, reduced
> lifestyle, joblessness, shortages, fear, etc. The two good points
> about inflation, diminished debt (paying back with cheaper dollars)
> and increased asst values do not apply in our current situation because
> that portion of the economy is stuck in deflation. We seem to be
> in a loose-loose situation and I have to agree with the author that
> if you look at the facts, i.e. if you look at company sales, if you
> look at debt availability, if you look at asset prices and mainly
> if you look at our leadership the only positive reality we have right
> now is hope.

Aug 14 02:16 PM

[TeresaE:]

One of my "customers" (a guy who used to buy from us, now not so much) called today to get a quote, he started the conversation with, "my customer called.."

I said, "get outta here, where did you find that?"

He laughed sadly, and said, they are hard to miss when only 5 call a day.

Anyone else ever notice that when the double the minimum monthly payments-and the associated doubling/tripling of interest rates-hit in November of '07, is when the "downturn" started?

Wonder if there is any correlation between the fact that millions of indebted Americans found out they made a deal with the devil.

Our payments have gone up since then, amazingly our balances never go down.

Who'd have thunk that stifling credit in an economy 100% reliant on credit would have a bad effect?

Especially when you couple it with millions already making less due to "competition" with Asia AND imported foreigners.

Nah, couldn't be.

Green shoots and recovery coming soon (to a third world country near you).

Aug 14 06:40 PM

[O-B-WON:]

While reading your article, I couldn’t help but see the accident scene where some poor slob was fatally injured on the ground with his guts hanging out…. listening to the paramedics telling him that he was going to be fine…

Don’t worry… just hang in there… you’ll be up in no time…

Aug 15 06:16 PM

[Hephasteus:]

Maybe banks will stop being able to afford to mow the lawns of all the repossesed houses they own. There's some green shoots for ya.

Aug 15 11:34 PM

[RatWatcher:]

On Aug 14 06:17 AM Ed Zimmer wrote:

> Not only has the American consumer hit a wall, the airbags didn't
> go off, at least not until the consumer was pulled from the wreckage
> and left to lie on the side of the economic freeway. Then the rescuers
> (govt) set off the airbags to protect the car (banks).
> While the govt is concerned about the banks, the consumer has been
> left to get better on his or her own, if they can. Now the Government
> wants to raise it's credit line so it can spend more. Kinda like
> dropping the jaws of life on the poor slob laying on the ground while
> propping pillows around the injured car.
> Great article, good points, some food for thought. I favor buying
> the dips in metals because there is just way too much funny smoke
> and mirrors in everything else right now.

I really like your metaphor, but 180 degrees about: the banks are in the drivers seat, and the taxpayer TARP airbag went off. They walked away whole. The car (consumer) was totalled. We are still waiting for the tow truck.......

Aug 16 12:41 AM

[Pessimistic...:]

Hang on to your ass folks. We are not done. I will say.. guess, 3rd inning just completed. If there is anything positive to come, it is the knowledge that we will have a retracement, a correction if you will. How much and exactly when is anybodys guess. many will say it should have already happened. some think it is around the corner. I say... what corner, when?? The truth is, nobody knows but there is a smell of blood in the water and just as you were on afraid to be in, then afraid to be out.. that original fear is eching its way back onto the forfront. Folks are poised to bail at the first whisper of a turn in the markets. We have a month.. maybe six weeks at the most. If I am correct my 401K will be up 60% from March lows. Then I will only be down 35% from the beginning of this beating. I will remain positive and keep a weary eye to the storm. Good luck to us all.




then be out

Aug 16 07:36 PM

[LuckyLarson:]

Great and thorough article Karl.
A small 2x4 on a railroad track can derail a train and a the economy just ran over an entire redwood tree! It's gonna get worse before it gets better for sure! I do appreciate some cheerleaders of the market because too much Doom and Gloom just makes everyone depressed. On the surface, it is easy to see how the United States of Entertainment can be lulled into believing "Tout TV." Wal-Mart and Target parking lots are still full, and Disneyland still had 20-40 minute waits in every line last week when I took my family there. Consumers are spending and houses and cars are still changing hands. Having said that, Just a 2% increase in residential foreclosures has destroyed many banks and just a 5 to 10 percent drop in sales can kill a food or retail franchise. Profit margins are extremely thin and large companies make huge personnel and inventory decisions based on projections. Those projections have been wrong! There are lots of ways to make money in down markets but I sure wouldn't bet on an economic re-bound in the next 12 months.
- LuckyLarson - Real Estate Investor.

Aug 17 08:15 PM