On the Ground Below

The Bureau of Labor Statistics, National Retail Federation, and Census Bureau released reports indicating that wholesalers and retailers are still adjusting to the economic climate, as price indexes continued to fall:

• Retail container traffic fell in November for the 16th month in a row. With this finding in mind, the National Retail Federation maintains its hypothesis that 2008 will be the slowest year for traffic since 2004, with a year-to-year decline of 7.1 percent.

• U.S. wholesalers lowered their inventories by 1.1. percent in October, though sales also dropped by 4.1 percent from the previous month, according to a Census Bureau report released Wednesday.

• As reported today, wholesale prices of finished goods dropped by 2.2 percent in November, following monthly declines of 2.8 and 0.4 percents.

The Cloud of Consumer Pessimism

As these prices fell, a few research groups found record retail sale declines last month. The International Council of Shopping Centers even deemed Black Friday and the following weekend’s shopping days a “poor start to the holiday season sales,” as it observed a year-to-year decline of 2.7 percent.

The cause of these sales declines: a hibernating consumer, hiding from any temptations to spend money this holiday season:

• The ABC News Consumer Comfort Index measured record-low levels of confidence for the fifth week in a row, as reported on Tuesday. According to the poll, 92 percent of consumers surveyed said the nation’s economy is in bad shape, while 79 percent of them rated today’s buying climate negatively.

• Perhaps as a result, shopping ranked second only to dining out as one of the top activities consumers planned to decrease, according to a poll by the National Association of Television Program Executives and E-Poll Market Research. About 35 percent of consumers also said they planned to stay local more in their socializing, if not at home. They may also hesitate to buy any gifts full price this holiday season – though they were also willing to splurge on themselves, as Women’s Wear Daily reported.

Attempts to Find a Silver Lining

Meanwhile, researchers are taking such economic and behavioral conditions in mind, in trying to find positive news within it all.

• Some, like MasterCard’s SpendingPulse, traced the origins of rising consumer pessimism back to the ongoing depreciation of petroleum, as wholesale prices for it and petroleum products dropped by 11.2 percent last month.
  The research group reported yesterday a 3.8 percent decrease in total retail sales, excluding auto purchases – the biggest month-to-month decline it has ever measured. The caveat: without the rapid decline of gasoline purchases factored in, retail sales growth would have otherwise remained relatively flat.

• In its latest study, the Kauffman Foundation posed to question whether recessions were a good time to start a new business.
  The study, examining entrepreneurship up till 1975, did not reveal anything too conclusive, as the research group found a number of other factors that had to be considered. The research group also acknowledged that potential entrepreneurs would be unwilling to leave their jobs to found companies during recessionary periods.
  However, when the study excluded the Great Depression and World War II – the most unusual periods of time – the Kaufmann Foundation found that slightly more companies debuted during recession periods than expansion periods.

Overall, this week’s numbers showed that consumer pessimism remains persistent as retailers and wholesalers continued adjusting to the economic environment. Whether such feelings or downturn behavior will fade first, time has yet to tell. But either way, as the next few weeks pass by, and as the new year approaches, new perspectives could perhaps lead to new solutions – or, at the very least, a break in the cloud.

Economists also noted as another indicator yesterday’s recorded 2.8 percent decline in wholesale prices – the biggest decline measured since over the past year.

While consumer prices are still 3.7 percent higher than they were in October 2007, experts still fear that overall business in the nation will suffer, as consumers actively seek lower prices in goods and services. As About.com writer Darrell Zahorsky wrote , deflation is “great news for holiday shoppers … but bad news for business profits in price dropping sectors.”

This year’s shoppers are already accustomed to seeing red-line prices, from even the biggest retailers. Many are waiting till the holidays draw closer for even greater discounts, which could amount to even smaller profit margins for retailers and a spiraling economic downturn.

During a deflation, any inclination toward borrowing and lending also dissipates. Consumers and business may even suffer from debt deflation – when its cost is driven up by falling interest rates and drying-up credit.

“Consumers [sic] recent reluctance to spend and borrow coupled with the banks ever tightening credit regulations are exacerbating the problem,” wrote Zachary Oxman, Wisdom Financial broker, in Seeking Alpha .

A Bloomberg News survey forecasted a 0.8 percent decline in consumer prices. Today, the news source recognizes a push from international leaders for an increase in government spending, as they observe a loss in customer spending power and a global economic downturn.

Meanwhile, The New York Times has observed increasing scrutiny of President-elect Barack Obama and his plans to stimulate the economy. For $5 billion, Obama proposes to expand the Small Business Administration’s Disaster Loan Program, by increasing the guarantee rate of private loans, in addition to temporarily eliminating fees for borrowers and lenders.

While wholesale energy prices fell 12.8 percent, wholesale gasoline prices dropped 24.9 percent after just a 0.5 percent decline last month.

So far in November, falling oil barrel prices and consumption have made current gasoline prices the lowest since summer 2005, according to the U.S. Department of Energy. The average retail price also dropped yesterday to $2.132 a gallon – a 2008 all-time low after prices peaked to $4.165 in July.

Meanwhile, executives and economic experts are still wondering how current prices will affect holiday retail sales, if at all. Kathy Lien of Global Forex Trading called the decline a “silver lining” for this season.

“Although gas station receipts will take a hit, lower prices at the pump will free up money for Americans to spend on basic necessities and holiday purchases,” the director of currency research wrote yesterday.

Eduardo Castro-Wright, head of Wal-Mart’s U.S. operations, has already reported such behavior this month, as made evident by company sales. As gasoline prices fell last month, traffic at its rural and urban stores increased, he said at a Morgan Stanley conference. Wal-Mart’s company sales have also risen 7.4 percent to $94 billion over the last quarter.

The International Council of Shopping Centers reported that nearly one of every four shoppers feel encouraged by lower gasoline prices to spend more – “albeit by only modest amounts.” Michael Niemira, chief economist and director of research, remains skeptical.

“Unfortunately, rising unemployment is holding back spending much more than the help that is coming from lower gasoline expenditures,” he said to the Wall Street Journal .

The U.S. Department of Energy’s information administration projected last week that regular gasoline prices will average at $2.37 a gallon. The average price of an oil barrel can also fall by more than half of its July 2008 price, to about $63.50.

Prices fell by 0.4 percent in September, following a 0.9 percent decrease the previous month. They are still 8.7 percent higher than they were in September 2007, as the Bureau of Labor Statistics reported last week.

The two-month drop in wholesale prices – collectively referred to as the producer price index – follows a 1.2 percent month-to-month increase and a 9.8 percent rise from July 2007, that being the sharpest increase since a 10.4 percent jump in June 1981.

Energy prices continued to decline as well, by a total of 7.5 percent over the past two months. While this has helped ease economists worrying about inflation, they cannot claim overall financial stability with the current state of wholesale prices.

Without food and energy prices factored in, the producer price index of finished wholesale goods still rose by 0.4 percent in September – a “good news, bad news story” as stated by Peter Morici, University of Maryland international business professor and Seeking Alpha contributor.

“That indicates that we have yet to see moderation in what businesses charge at a wholesale level,” he said in a phone interview.

Some wholesale prices of finished goods – including that of women’s, girls’ and infants’ apparel; plus office and store machines and equipment – fell after rising in August. But the prices of finished consumer foods continued to increase by 0.2 percent, after rising 0.3 percent in August. Those declines also accompany a 15.4 percent rise in prices of intermediate goods as received by manufacturers, according to the report.

And while those producers may have noted a change in their prices, consumers did not see much change at all. In fact, the consumer price index, or the change in prices as seen by households, was “virtually unchanged in September,” after just a 0.1 percent decrease in August, the Bureau stated. This follows a 1.1 percent overall rise in June, which included a 3.8 percent increase in transportation prices and a 6.6 percent increase in energy prices.

Morici had predicted for September a 0.2 percent decline. Now he expects more of the same moderate pricing in the future – “more tepid increases, or maybe decreases in wholesale prices through the end of the year.”