Friday, November 14, 2008

Retail Sales: Cliff Diving but a Silver Lining

From Bloomberg:

Retail sales in the U.S. dropped in October by the most on record, pushing the economy toward the worst slump in decades.

The 2.8 percent decrease was the fourth consecutive drop and the biggest since records began in 1992, the Commerce Department said today in Washington. Purchases excluding automobiles also posted their worst performance.

Spending may continue to falter as mounting job losses, plunging stocks and falling home values leave household finances in tatters. Retailers from Best Buy Co. to Nordstrom Inc. are cutting revenue forecasts ahead of what may be the worst holiday shopping season in six years.

``We are in the eye of the storm,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who accurately projected the decline in sales. ``The recession is clearly intensifying. The next few months will look pretty bad. The fourth quarter will be even weaker.''

According to the Census data all areas took a major hit: Autos -5.5%, electronic retailers -2.3%, department stores -1.3%. In other words, the consumer is really cutting back on spending. Here's the relevant graph from the Census information:

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This shouldn't be a surprise. The stock and real estate markets are in terrible shape and the employment picture is horrible. Put these two things together and you get a consumer led contraction.

As a result, several retail sectors are in terrible technical shape, trading at or near multi-year lows:

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Click for a larger image

Click for a larger image

Click for a larger image

Click for a larger image

However, there is something good emerging from this. When consumers don't spend on stuff they save. And on that front, banks are helping out:

Banks across the U.S. are engaged in a heated competition for deposits as the battered industry tries to shore up its funding sources.

From giant Citigroup Inc. to tiny S&T Bancorp Inc. -- which is based in Indiana, Pa. and has just 55 branches -- banks are responding to uncertain times by sharply increasing the interest rates paid on deposits.

The result is a boon for consumers hungry for higher returns as the stock market lurches. But the moves are causing pain for large and small banks across the U.S. by squeezing their profit margins.

The desire to lure depositors is triggering a "national price war," says Michael Poulos, a partner at financial-services consulting firm Oliver Wyman. "In the past 15 years, there's been nothing like this. The level of competitive intensity is unprecedented right now."

The deposit-collecting binge could help banks build up the funds needed to make new loans. That could help ease the credit crunch choking the economy.

Banks are starting to attract customers the old fashioned way; they are luring people by paying them a meaningful rate on their deposits. Simply put, banks must return to standard, nuts and bolts banking. They need to increased their deposit base to make loans. And the way to do that is to acquire depositors. So while the retail news is bad in the short run, it looks as though an important and fundamental change may be starting. And that's a good thing.