Robert Loftus'  Instablog

I recently spent another Sunday observing consumer behavior in a number of local retail outlets.  My most surprising observation this past weekend has to do with the quality of consumer goods.  While walking through the seasonal section of one major national big box retailer, I was shocked at the very low level of quality in that retailers seasonal product line.  It appears that some big box retailers have sought to maintain profitability, while still being able to offer lower prices for consumers during this recession by sacrificing build quality and aesthetic appeal.  This observation was backed up by visits to stores of several other major national retailers.  The quality of construction of the items I observed, and the aesthetic quality of those items was so bad, it's hard to imagine any self-respecting consumer would wish to purchase these items.  

The business models pursued by many big box retailers depend upon massive quantities of merchandise and massive vertically integrated supply chains. Unfortunately, to sustain those massive stores and supply chains, these retailers require product markups that start at 400 to 500%.  Those kinds of markups offer a tremendous amount of headroom for product markdowns, but if the downside of that is marking sub-par quality merchandise up to prices where it can never possibly sell at full price, the practice becomes an exercise in futility.  

Also, it should seem obvious that for an American public that is feeling jaded over endless bad news about federal bailouts and economic malaise, the worst possible strategy any retailer could pursue would be to down-spec product lines and try to sell obviously shoddy goods.  In fact, some retailers may want to think of that old "Mom" saying about saying things nice; in this case we'll paraphrase: "If you can't get something decent to sell to people, better not to sell that kind of merchandise at all."   Unless major big box retailers can find some way to alter their business models and start to offer higher quality merchandise for consumers, their business models may soon prove out-dated, and consumer spending is likely to remain flat.  


Disclosure: No positions

The March 2010 Case Schiller Index was released recently and the new report shows that US Real Estate markets may still have some ways to slide.  I've been predicting for some time that before too much longer we'll see the majority of markets in the 20 city index in the 90 to 110 range with the 20 City Index Composite figure sitting in the low 120s.  At present only 4 markets in the 20 city index show figures within that range (5 if you count Detroit which is the statistical outlier at 67.66).  An additional 5 markets listed in the index are currently in the 110 to 120 range, and those elements are likely to fall below the 110 threshold when July figures (unaffected by the Federal home-buyer stimulus) are released.  Tampa-currently sitting at 136.46, seems buoyed by what I called the "North of Sarasota Effect", a phenomenon in Florida Real Estate where everything north of Rte 72 seems to have held far more value than communities south of that dividing line.  Eventually one should effect the Sarasota Effect to diminish as unemployment rates of 10 to 12 percent in those communities eventually drag property values down further. 

There is absolutely no way that Real Estate markets can recover in the near term.  With unemployment at 10%, incomes and hours stagnant and growing numbers of homes in various stages of default and foreclosure, to expect a resurgence in Real Estate is akin to expecting a strong comeback for General Motors based on the strength of the Saturn product line.  The market is over-saturated with supply, and demand seems unlikely to increase until the unemployment rate falls below the 7% range.  




Disclosure: no positions

Under normal conditions, manufacturing activity in the United States no longer has any potential to support wage growth.  As soon as employment reaches a level where competition for employees has the potential to result in an uptick in wages for factory workers, productive capacity is out-sourced as a means of increasing inter-job-seeker competition and reducing the likelihood of union organization amongst remaining US workers.  For this reason, recent Regional Fed report indications of an increase in US manufacturing activity are not a sign of the return of US manufacturing, and there is absolutely no way that a manufacturing led return to full employment (as in an unemployment rate of less than 6%) will ever occur.  

It is actually developments that affect the productive capacity of other manufacturing and employment markets that have the potential to provide some degree of stability to the US job market.  [In an] announcement last week...by the National Development and Reform Commission [of China] to the effect that power costs for energy hungry industries such as aluminum, cement, steel, zinc, ferro-alloy, calcium carbide and sodium hydroxide would double from June 1^st. (Burns, 2010, May 18).  These increases in cost are directly related to increases in the price of coal-the primary source of energy for most of China.  An increase in the cost of production in China has the potential to alter the cost/benefit analyses of multi-national manufacturers and may serve to stem the tide of out-sourcing of productive capacity from the US, thereby helping to preserve some of the jobs created by recent growth in manufacturing.  

It is still naive to imagine that as the economy improves out-sourcing will stop and manufacturing will make a large-scale comeback in the US.  However, the combination of US Consumers' recent distaste for goods imported from China, Oil prices that seem unlikely to fall below $60/barrel anytime soon (precluding significant cost savings for multi-national shippers) and this recent development affecting rates for electricity in China may mean that resumption of the aggressive out-sourcing of US productive capacity may slow enough to allow for a temporary improvement in our national employment picture. 


Burns, Stuart. (2010, May 18). Chinese Aluminum Smelter Costs Set to Rise.  Retrieved May 18th, 2010 from http://agmetalminer.com/2010/05/18/chinese-aluminum-smelter-costs-set-to-rise/ 

Disclosure: no positions