Long-standing readers of this column know that from time to time I invoke the wisdom of my grandfather. One of his favorite sayings was: “You take care of the cents and pennies and the dollars will take care of themselves.” A true child of her father, my mother would weigh in with: “It’s the little things of life that count.”
As we enter a new year, the little people of America finally “count” because they are paying close attention to cents and pennies. That’s troubling for Wall Street and for an economy that likes to see the little people spend, spend, spend. Indeed, consumer spending has been keeping the U.S. economy afloat as the real estate market and major banks founder in the collapse of sub-prime mortgages.
Just before this issue of TNJ went to press, stock markets tumbled yet again, largely on bleak projections for consumer spending during the year-end holiday season. News that third-quarter profits fell 9 percent at JC Penney Co., the country’s third largest retailer, and Penney’s own warning that it was slashing its fourth-quarter outlook helped trigger the slide. On Nov. 15 alone, the Dow Jones Industrial Average, which tracks the performance of 30 of the largest and most widely held public companies, fell more than 400 points. Penney says its profits were hurt by weak sales in September and October. It was not alone. Limited Brands, Macy’s, Nordstrom Inc. and even Wal-Mart, the world’s largest retailer, posted sales declines in the quarter, notwithstanding aggressive discounting and superstar-enhanced advertising. The International Council of Shopping Centers-UBS index, which tracks 53 stores, says October 2007 was the slowest October for U.S. retail sales growth in 12 years.
The retailers that did do well in the quarter were Costco Wholesale, BJ’s Wholesale Club and discounters like TJX Cos., ample proof that consumers, bruised and battered by higher gas and food bills, depreciating home values, foreclosures and tighter credit, are taking care of cents and pennies. With Wall Street hobbled by the exposure of major banks to subprimes, all eyes now are on the little people—the persons/families that mob the malls on holidays—to prop up the economy.
One investment strategist says a recession is inevitable if “the retail shoe drops” in the 2007 holiday season, meaning consumers seriously cut back on spending. A recession could be averted, she says, if mortgage bankers and banks in general start a fire sale on the nonperforming real estate properties in their portfolios and “smoke out” investors who are holding out for lower housing prices. Even if they did, blue-collar consumers—the little people who would come out for a fire sale—are just about tapped out of their savings. That would leave deep-pockets Uncle Sam as the only “white knight” to bail out the financial and real estate sectors and, to some extent, the consumer sector, the strategist says. At that point, she predicts, Congress and the White House will have to work out something akin to New Deal relief during the Depression. The Democrats, who control the Congress, would not want an economic downturn during the 2008 election year because that downturn would be pinned on them.
All this because of little people, cents and pennies.
On behalf of The Network Journal family, I wish you good health, peace and wisdom in the coming year.
By Rosalind McLymont