Home Money Recession Fears — and a Box of Crayons

Recession Fears — and a Box of Crayons

by Bruce Haring

It’s back-to-school time, which is usually a glorious moment for beleaguered retailers. But this year, there’s more at stake than a new box of crayons for little Johnny.

There’s a whiff of recession in the air, and that odor may gain some strength if US retailers start reporting a lack of sales from back-to-school efforts. Stocking up on school clothes and supplies is one of the prime drivers of consumers into the stores, and any lack of enthusiasm by them at the cash register does not auger well for the overall economy.

Fueling the pessimism is the hangover from the results of the first quarter of this year, when the economy shrank 2.9% at an annual rate, the biggest drop in five years. That was not the news anyone wanted to hear.

There were a ton of explanations at the time that pullback was announced — bad weather, a drop in exports, a post-Christmas hangover — but it still weighed heavily on purchasing decisions by consumers who are skittish from the last contraction and a job market that has since gotten leaner and meaner.

“We are experiencing a retail ‘funk,'” Kip Tindell, chief executive of The Container Store, said earlier this week. He and other retailers that fall into the “nice to have, but not necessary” category have been the victims of the contagion, reflecting the general wariness that’s out there.

The economy has lately been propped up by good news from the stock market, which topped 17,000 for the first time last week before a more recent pullback. But a lot of that activity has been stock repurchases by corporations and institutional investors, who have no place else to put their money.

Some economic Cassandras feel that stock fundamentals are getting into a dangerous imbalance. The market usually doesn’t do anything drastic in the Summer, but we’re nearing the halfway mark of the season and a minor crisis in Portugal caused a big spook this week. Could something worse spark a major sell-off?

Tiptoe Into the Fall

Heading into the always-treacherous Fall, any sudden bad news, be it poor retail performance, a volatile change in world events, or even an unexpected domestic development, may send things south in a hurry, particularly for consumers. Call it a crisis of confidence. And certainly all the hungry mouths massing at our southern border don’t instill a lot of hope that things will be better for people who were hit hard in the 2007-2009 era, and are just staggering back to their feet.

On a macro level, many of the earnings gains in the corporate ledgers have come from cost-cutting rather than increased sales. That can only go on for so long, and companies have been playing the cutting game for a few years now. It’s possible that we’ve reached the end of the line for that strategy.

A survey released on Friday, July 11th by the National Association for Business Economics claims the average forecast for growth in the second quarter has fallen to 3%, down slightly from a June forecast of 3.5%. Worse, NABE says yearly growth will be just 1.6% instead of the 2.5% that they earlier projected.

As usual, the NABE hedged its bet, claiming the first quarter is dragging down results, and that there are positive signs all around that growth will be sustained.

But who are you doing to believe, an economist or your own eyes? Look at the vacant stores. Think of the people you know who are out of work. One of the major factors to consider is home purchases, which have suddenly slowed after being driven for a year largely by institutional and foreign investors. It’s a sign that no one is feeling all that irrationally exuberant about the future, and are holding off on big ticket items.

It may well be that everyone is diverting available cash into those boxes of crayons. But for a country that still isn’t confident that all is well with our economic system, it’s a real sign that there may be trouble ahead.

You may also like