Retail sales "fell off a cliff" in October

Graph showing retail sales for October, 2008. From The New York Times.

I heard about this story on Friday in the New York Times. I'm not sure I have much to comment on this story:

Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.

The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.

Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom.

Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. Deep discounters like Wal-Mart and BJ’s Wholesale Club reported gains.

Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. The reports highlighted once again the depth of the economic problems confronting President-elect Barack Obama.

Consumers are cutting their spending for many reasons, but high on the list is the weakening employment picture. Even people who still have jobs are pinching pennies as they hear of layoffs among friends and family. Unemployment has hit 6.1 percent, and a new jobs report due Friday is expected to show further deterioration.

“October was every bit as bad we feared,” said John D. Morris, a retailing analyst with Wachovia. “Maybe worse. October’s numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season.”

This is just god-awful bad. Consumers cut back on spending, accounting for two-thirds of the U.S. economic growth. Retailers chop prices on goods, and cut back on stocking their shelves with inventory. This reduction of inventory goes back to the manufacturers, which then shut down their manufacturing in response to lower orders. The reduction of manufacturing of goods cuts down on the purchase of raw materials, forcing the companies producing the raw materials to also cut back on their output. Thus, we have a slowing in the supply as a result of decreased demand. And while all this is happening, the producers in retail stores, manufacturing, and the companies providing the raw materials, are also laying off workers, which is increasing the unemployment in the U.S., forcing these unemployed workers to also cut back on their spending. It is like an endless cycle. And what is worst, the retails sales have fallen off a cliff just before the Christmas shopping season:

Retailers usually make most of their profit during the Christmas shopping season. And while they always offer impressive sales, they plan to discount only about 25 percent of their merchandise, not half of it, Mr. Cohen said. Too much discounting erodes profits. And by cutting prices so early, retailers risk running out of stock, or color and size options, before the season’s home stretch.

A few retailers have strong balance sheets, but many do not, and with credit hard to find they can ill afford a disastrous Christmas season. Analysts said they expected a new wave of bankruptcies after the first of the year.

Bankrupt and ailing retailers are undercutting some of their healthy peers. Last week, for instance, Mervyn’s announced a 149-store liquidation sale just in time for the holidays. Other such sales are already under way at Steve & Barry’s and Linens ’n Things. Circuit City, the struggling electronics chain, began liquidation sales this week at 155 stores it is closing.

Mr. Cohen of NPD Group said wise retailers would not sacrifice profits just to shove goods out the door. But he acknowledged that in such a panicky climate, the race to discount merchandise had become nearly unstoppable.

“What’s happening is the retailer is almost saying, ‘Please just come in,’ ” he said. “ ‘We’ll pay you to shop.’ ”

The American consumer is completely tapped out. They have found themselves caught up in a debt trap of easy consumer lending, a housing bubble that brought Americans into even more debt as they purchased houses at speculatively high prices, before the crash, and now the threat of unemployment as the U.S. job losses hit a 14-year high. It is no wonder that the U.S. economy contracted in the third quarter of this year. And it will contract in the fourth quarter of this year, and possibly into next year. To make matters even worst, we've got Mervyn's, Circuit City, and Linen's and Things going out of business, throwing even more people out of work as they close their doors.

I don't know what the answer is.