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Guest Post: 10% Savings Rate + Consumer Spending At 65% Of GDP = Retail Disaster
Submitted by Jim Quinn of The Burning Platform
10% Savings Rate + Consumer Spending At 65% Of GDP = Retail Disaster
Now that the Wall Street Journal, New York Times, CNBC and every
other mainstream media outlet have figured out what some financial blogs
had figured out months ago http://theburningplatform.com/blog/2010/08/26/the-great-deleveraging-lie/,
everyone knows that the American consumers have not yet begun to
deleverage. Consumer credit outstanding peaked at $2.58 trillion in July
2008. It has plummeted all the way to $2.42 trillion today, a 6%
reduction over two years. The full $160 billion reduction can be
attributed to write-offs by the Wall Street, Ivy League MBA run, banks.

American consumers do not want the Age of Mammon to end. They will
need to be dragged kicking and screaming into the Age of Austerity.
Consumer expenditures peaked at $10.2 trillion in the 3rd Quarter of
2008. They reduced spending for two quarters, but when Big Daddy
Government handed them billions and told them to spend it on cars,
appliances, and homes, they dutifully obeyed. Today, consumer
expenditures stand at an all-time high of $10.3 trillion, still
accounting for 70.5% of GDP. There really has been no hint of austerity
by Americans. It is a false storyline. The major reductions in
consumption still loom in the future.

The myopic financial “experts” have no sense of history or the
concept of reversion to the mean. They didn’t get it with home prices
and they don’t get it with consumer expenditures. The country has been
on a 30 year drunken binge of debauchery, debt accumulation and
delusions of never ending 10% annual home price gains funding a glorious
30 years of retirement on an island in the Caribbean. These visions of a
sugar plumb life of leisure are slowly giving way to the nightmare
scenario of eating cat food in your very own cardboard box McMansion.
The bombastic Boomers are turning 50 years old at a rate of 10,000 per
day. A staggering 38% of workers between the ages of 45-54 have less
than $10,000 of retirement savings and a mind boggling 29% of workers
over 55 have less than ten grand in their retirement savings, according
to the Employee Benefit Research Institute. It is no longer a matter of
people deciding whether to save, it is a matter of saving or else living
in abject poverty in their old age.
In the good old days, before the advent of the credit card in 1969,
Americans saved up to buy a house, a car, or an appliance. Consumer
expenditures as a percentage of GDP stayed in a range of 61% to 64% from
1960 until 1980. This range was reflective of a balanced economy that
provided good paying wages to blue collar workers who produced products
that were sold in the US and in foreign countries. What a concept.
America ran a trade surplus. The financial industry did not drive the
economy, they provided financing for businesses that wanted to grow and
produce. Sounds quaint. As the Boomers entered their 30s in the early
1980s the easy credit delusion, promoted by Wall Street and
the mainstream marketing machine, convinced the spoiled materialistic
Boomers that wealth was measured in cool stuff rather than accumulated
savings invested over time. Consumer spending as a percentage of GDP
surged from 62% to 70% over the next two decades.

Real wages have been stagnant since the early 1970s. With moribund
wage growth there was only one way for Boomers to live the faux American
Dream – Borrow to the hilt. And borrow they did. The personal savings
rate fell from 12% in the early 1980s to below 2% in 2007. The concept
of deferred satisfaction was cast aside by the “no worries” Boomers.
Saving and frugality was for the Depression era old fogies. The old
timers didn’t understand modern finance. Why wait until tomorrow when
you can have it today by just whipping out a plastic card? The delusion
of debt based “wealth” grew for 25 years, encouraged and stimulated by
Alan Greenspan and his bubble blowing machine.

The debt party reached its apex between 2005 and 2007. Boomers
willfully ignored or chose to not comprehend the concept of reversion to
the mean. They believed with all their hearts that their homes would
appreciate at 10% per year for all eternity. To prove their faith in
this belief, they used their homes like an ATM and withdrew $1.9
trillion of “equity” between 2005 and 2007 and spent it on 2nd homes,
cars, boats, flatscreens, vacations, home theaters, and other assorted
must have doo dads. They borrowed against their homes at the absolute
peak in home prices. Prices have fallen 30% from the peak, with some
markets down 50%. This has left millions up to their eyeballs in debt.
The home ATM flashes “INSUFFICIENT FUNDS” when they attempt a withdrawal
today.

So here we stand, two years after the financial system collapsed.
Government stimulus has provided an artificial boost to GDP. They have
tried every trick in the book to convince Americans to keep consuming at
a rate higher than they are earning. It is failing because consumers
have been shaken from their materialistic stupor. They are slowly coming
to the realization that they must save or they will suffer greatly in
the next 30 years. The savings rate has been moving erratically higher
and is now in the range of 5% to 6%. Ideally, it would need to reach 14%
in order for Americans to save enough to cover their retirement. This
will never happen. Americans will cut back but they will not revert to
the frugal ways of their grandparents.

The GDP of the country is $14.5 trillion. Over the next decade
consumer expenditures as a percentage of GDP will fall from 70% to 65%
because it must. With stocks destined to return 5%, bonds yielding 2.5%
and no equity left in their houses, consumers have no choice. The annual
reduction in consumer expenditures will be north of $700 billion. The
annual disposable personal income of Americans is $11.3 trillion. The
savings rate is 6%. It will rise to 10% over the next few years. This
would be $450 billion more savings and $450 billion less spending. This
will not happen overnight. It will take at least a decade. Mass delusion
wears off slowly and one person at a time. Charles McKay summed up the
last 30 years in two quotes from his book Extraordinary Delusions and the Madness of Crowds, written in 1841.
“Money, again, has often been a cause of the delusion of the
multitudes. Sober nations have all at once become desperate gamblers,
and risked almost their existence upon the turn of a piece of paper.”
“Men, it has been well said, think in herds; it will be seen that
they go mad in herds, while they only recover their senses slowly, and
one by one.”
Does this paint a picture of an economy roaring ahead? We have at
least a decade of low or no growth ahead. Deleveraging after the biggest
debt party in history is really a bitch. The industry which is about to
be dealt a mortal blow is the retail industry.
Retail Death Knell
Our entire consumer society has been built upon a foundation of lies.
The biggest being you could get wealthy without saving. The other being
that you were wealthy if you owned stuff that made you look wealthy.
There are 1.5 million retailers in America. There will not be 1.5
million retailers in 2020. The winnowing of the chaff from the wheat has
begun, but will accelerate over the next decade. The mom and pops are
already closing up shop in record numbers. The shocking revelation that
major mega retailers such as a Target or a Kohl’s might not exist in ten
years will not be believed today. Ever hear of Montgomery Ward?
What most people don’t understand is that the
mega-retailers’ strategic plans were based upon never ending store
growth, 5% comparable store growth for all eternity, a continuous flow
of increasing easy credit, the American population staying frozen
between the ages of 30 and 50 years old, and a delusional materialistic
greed embraced by the masses. Mega retailers without growing comp store
sales are like sharks that can’t swim. They will die. The comp store
sales growth is essential to overcome the effects of cannibalization
from new stores. The CEOs of these companies have never modeled a decade
of declining sales. They still believe it can’t happen, even though it
must happen. Delusions die hard, especially for CEOs.
I’ll use Target as an example. Almost everyone would agree they have
been one of the best run retailers of the last two decades. They have
over 1,700 stores in the US, with annual sales exceeding $65 billion and
profits of $2.5 billion. How could a retailer this large and successful
ever go bankrupt? They have $16.5 billion of debt and $15.3 billion of
equity on their balance sheet for a 52% debt to equity level. This is
not a dangerous level, but it is a heavy debt load. The deterioration
always begins on the sales side. Comp store sales have been
deteriorating since 2005 and were negative in 2008 and 2009.

The impact of this sales deterioration can be seen in their net
income over the last five years. It is at the same level as it was in
2005 and $361 million lower than 2007. Target opened 343 new stores
between 2005 and 2009 and its net income is the same. Net income per
store has dropped from $1.72 million in 2005 to $1.43 million in 2009, a
17% drop per store. In their peak profit year of 2007, they generated
$1.79 million profit per store.
What most people don’t know is that Target goosed their profits using
the same method that Americans used to get “rich”. EASY CREDIT. When
you’ve run out of ideas to grow your business, offer easy credit to your
customers. It worked like a charm for Target until it didn’t. They
issued millions of credit cards to the delusional masses. Who needed to
sell stuff, when you could make so much lending money? In 2007, the
Target credit card accounted for $1.06 billion of their $2.85 billion
profit, or 37% of total profits. This was up from 22% of their profits
in 2004. They’ve been learning a difficult lesson as credit card profits
plunged to $400 million in 2009 as they desperately tried to sell their
rapidly deteriorating portfolio with no takers to be found.
| 2009 | 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|---|
| Net Income (1,000′s) | $ 2,488,000 | $ 2,214,000 | $ 2,849,000 | $ 2,787,000 | $ 2,408,000 |
| YoY % Chg | 12.4% | -22.3% | 2.2% | 15.7% | 27.7% |
| Diluted EPS | $ 3.30 | $ 2.86 | $ 3.33 | $ 3.21 | $ 2.71 |
| YoY % Chg | 15.4% | -14.1% | 3.7% | 18.5% | 30.9% |
| 2009 | 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|---|
| Store Count | 1,740 | 1,682 | 1,591 | 1,488 | 1,397 |
| Store Sq Ft (1,000s) | 231,941 | 222,588 | 207,945 | 192,064 | 178,260 |
| Employees | 351,000 | 351,000 | 366,000 | 352,000 | 338,000 |
| Net Sales per Store (1,000′s) | $ 37,075 | $ 38,426 | $ 39,929 | $ 40,123 | $ 37,908 |
| Net Sales per Sq Ft | $ 290 | $ 301 | $ 318 | $ 316 | $ 307 |
| Net Sales per Employee | $ 180,726 | $ 175,409 | $ 171,228 | $ 167,762 | $ 162,765 |
The beautifully constructed staircase of store growth seen in the
chart below has reached the top floor. If Target foolishly continues to
build new stores while Americans ratchet up their savings and ratcheting
down their spending, they will end up taking an elevator straight to
the basement. The credit card fountain of profits is gone. Same store
sales growth is gone. New market growth is gone. It’s time to get real.
The upper management of every retailer in America better pull out their
little models and plug in declining consumer spending for the next
decade. This will reveal the stores that won’t cut it. They will need to
close them based on profitability. Will this be done? Absolutely not.
The hotshot CEOs will think a better advertising campaign will do the
trick. Delusions die slowly.

Many might think I’m being overly pessimistic. I would contend that
I’ve presented a best case scenario. I’ve completely ignored the
implications of peak oil and $5 per gallon gas on mega retailers that
require you to drive miles to shop at their stores and source all of
their goods from thousands of miles away. Combine that with an ever
declining USD that drives the prices of imported good higher and you
have a perfect storm for retailers in America. I’m sure the scenarios
I’ve presented will do wonders for commercial real estate and the banks
that are on the hook for those loans.
In the immortal words of David Byrne, “the future is certain”.
WELL WE KNOW WHERE WE’RE GOIN’
BUT WE DON’T KNOW WHERE WE’VE BEEN
AND WE KNOW WHAT WE’RE KNOWIN’
BUT WE CAN’T SAY WHAT WE’VE SEEN
AND WE’RE NOT LITTLE CHILDREN
AND WE KNOW WHAT WE WANT
AND THE FUTURE IS CERTAIN
GIVE US TIME TO WORK IT OUT
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
Feelin’ okay this mornin’
And you know,
We’re on the road to paradise
Here we go, here we go
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Nice, but Howard Davidowitz has been saying this for years. What's new?
Trees grow to the sky. At least that's how economics work today.
easy when people no longer pay a mortgage
This makes SPG and IYR look awfully cheap.
Americans are being patriotic by spending. Many, happy, spending patriots. Its what we do. Pump up GDP. Its a self-fulfilling prophecy. Debt is wealth (seem to recall hearing that before).
This has bothered me ever since I was little, and I could not understand it at all. And that is: the amount of clothing and clothing stores in America. It doesn't make any sense whatsoever. We make fun of iPhones and Kindles, but that's nothing compared to the price and turnover of clothes people buy. It's insane.
Even worse is the fact that fashion is driven by the insane hooligans who max out their credit cards on apparel. I tried buying a pair of jeans last weekend (haven't bought a pair in 3 years at least); hundreds of jeans, nothing fit, and when it did, the jeans were already stained and torn as if someone had worn them for years. WTF?!
This guy is an idiot.
In all his ranting, he never once pointed out WHY Americans aren't saving.
When the criminal Fed sets interest rates to zero and the criminal congress is absconding with all their wealth through taxation, WTF does he expect to happen?
He acts like this is somehow the fault of American consumers.
They will figure out a way to make that the belief. Unless we stop them.
He's no idiot but he left out the entire menagerie. He's just addressing the Sheep component of the equation. He left out the Dogs and the Pigs (3 different ones)
Haha, charade you are.
Dunno but, last time I checked, if you didn't spend a dollar or get robbed, you still had a dollar left - even if that dollar is worth horsepiss. Seems real smart to spend your last dollars just cause you can't find an appropriate investment (or not). Well, at least you won't have to suffer the psychological trauma of getting your mattress blagged...
I misplaced the article you wrote on this topic. Let me know where I can find it.
Uh Oh!
Will mobs carrying torches be coming after us if we, in our household, disclose that we pay off our bills at the end of every billing period? As Un-American as it sounds, that is what we do. Once in awhile my wife incurs a late payment fee but not often.
For many years, it made economic sense to have some debt. When easy Al took the discount rate to 1% in 2003-4, at the time that a recovery from the dot-com bust should be starting that something was very wrong. With interest on home loans directly deductable, it was obvious that the FED was tryiing to give away money. Why?
I didn't know why but it was time to "batten down the hatches". NO debt (of significance).
It took quite a few years for the storm to finally arrive but it is here.
Now, less is more.
Credit cards- OK but paid monthly.
The Fed and Congress MADE you buy that Mercedes and McMansion? They MADE you take out a home equity loan and take a vacation in the Caribbean?
Interest rates weren't zero from 1980 until 2005. You're the fucking idiot.
When the federal government sets interest rates at a point equal to or below the rate of inflation, people MUST SPEND their money or they will lose it.
This spending entails the buying of commodities, property, equities, and other such goods that will at least appreciate at the rate of inflation.
Thus, we can say the Fed FORCED CONSUMERS TO SPEND by driving down rates.
try again..
Good article, good use of charts, and while it may be a story you've heard before generally, the use of Target as the, um, target, is illuminating for me and helps focus the case - also the "news" that consumers aren't really retrenching, but I think that is more complicated than what is said, since I think alot of them are by choice and by necessity. But, I'll read Jim's stuff all day long - keep up the good work
I'd suggest the fact that the median household of Americans is now declining in nominal terms, after decades of declining in real (inflation-adjusted) terms has more than a little to do with it, too. In fact, for most people earning the median (now less than $50,000/yr), struggling to make ends meet has a hella more to do with not saving than interest rates and taxes. You can't save what you ain't got left. And what's happened to the price of a cardboard box to live under in a time of declining income ain't that funny.
That isn't the fault of American consumers, either.
Credit cards and no mortgage payment bitchez!
Its not the folks who don't understand how economics works screwing things up, its the people who don't understand that it doesn't.
- profd
Excellent article. You might also add that there is more retail sq ft per capita in the US than in any other country...this will have to change too.
The Detroit area has plenty of space available in formerly busy shopping centers.
.....and the emptied out malls in CA will easily retro into nice big prisons.
So you mean quiting a high paying job, pulling equity out of the house numerous times to pay the mortgage, running up credit card debt, and draining retirement savings is not the way to go? Rut oh.
-profd
the savings rate is an academic construct. Per the FoF the net savings - read after PCE - shows somehting like 1.8T in cume savings since 2007. Look at deposits, equitioes and bonds or use YE 2008. Even assuming the debt reduction is through repayment that still leaves a gap in the several hundred billions. Where did the money go? if indeed the "savings" is real would it not have been channeled into financials assets? deposits? or other assets?
Right, because money used to pay down debt is classified as "savings" although in reality that money is being destroyed. Which diminishes the supply of dollars in the system, as you well know.
Hard to keep that % as more and more Americans lose their credit ratings. This alone based on the spike in personal bankruptcies and foreclosures will take the consumer out of the 70% range. Simple math, don't need to be a science rocket to figure out where this is going.
From my house, I can drive to 5 different Target stores within 8 miles. That may be a bit unusual, but there it is. If I make it a 20 mile radius, it pulls in about a dozen more. That's crazy. There's also two super Wal-Marts, and maybe some I don't know about.
Dallas/Fort-Worth?
I'm betting So. Calif. 'cause in my mind that's where even overdone gets overdone; I think it's the craziest place on the planet; but that might be out of date, and I'd like to know the answer, too.
Within 10 miles, we've got two Targets (one regular, one Super), three Super Wal-Marts, three Home Depots, and two Lowes.
Saturated.
Wow, those are amazing posts about the overbuilt stores; the numbers are completely insane. I've been watching something similar happen here on the Island of Hawaii; but it's on a tiny scale; nevertheless its crazy. First they built a Wal-Mart, than a Cost-Co, than a home depot, than a Lowes; and I felt very strongly that the people who made these business decisions were crazy; basically, nobody lives here and there isn't any industry, it's some kind of a retirement zip code on a rock out in the middle of the ocean; now I see they really are crazy; in the sense of completely devoid of a sense of scale and proportion; very interesting. "Over-installed capacity" one of the hall marks of an inflationary economic epoch; which ends in a deflationary crash. There's too much everything, globally; kind of an idiotic statement; but true in a very real sense; Steel, specialty steel, copper wire, plastic, feed stock and finished material, on and on. Very interesting. This information about the density of the retail stores gives me a strong impression of the amount of crash and burn necessary in CRE.
It would be almost OK if they built their buildings to last for 100 years. most won't make it 50 I bet.
Great post, just one point, your 52% debt to equity calculation is actually the debt to capital ratio. They are two different calculations. Just the accountant in me coming out. I included a link for your reference.
http://en.wikipedia.org/wiki/Debt-to-equity_ratio
Thanks for the note. I was scratching my head about that one too.
I do a lot of work for TGT, and hear a lot of their internal business meetings. For the past decade I've been wondering about their expansion, their same-store sales and earnings-per-store trends. They've been smart, maybe smarter than anyone else, but their strategy does seem to depend long-term on repeal of the laws of gravity.
I was a true believer until I heard, about 3 years ago, that the credit cards were the most profitable part of their business model. And they were laughing at all the doubters who thought it was risky to lend the money to your customers (sorry, "Guests") to buy your stuff. Us Nervous Nellies just didn't understand how smart and clever Target really was.
Once the credit card thing blew up in their faces, I started wondering how much of the rest of it all was long-term luck rather than qualitatively different strategery. Having just heard in the media about the smaller planogram TGT is rolling out for Seattle; maybe they're test-driving the austere future? I sure hope so. I make a lot of money working for TGT. And I live here in Mpls., so their future health is very important to me. BTW, I'm very cautious to never post anything about my clients that isn't common knowledge, so I'm happy to see these stats posted (I had seen them before, but in privileged circumstances so I felt constrained).
I had no idea Target was an important "shadow banker"; the numbers are shocking to me. "wondering how much of the rest of it all was long-term luck---" yes; once again the grown-ups turn out to be full of ca-ca. All the important people know just what to do, as long as its what all the other important people are doing; and it works fine; until it doesn't. "test driving the austere future--"; I like that; that's quotable.
Actually, buying a new car counts as savings (investment in consumer durables), whereas continuing to drive your old car counts as dissavings (consumption of fixed capital). Of course, if you pay for the new car with credit, that goes on the dissavings line, and it's all a wash.
"the Boomers entered their 30s in the early 1980s the easy credit delusion... convinced the spoiled materialistic Boomers..."
"there was only one way for Boomers to live the faux American Dream – Borrow to the hilt."
"The concept of deferred satisfaction was cast aside by the “no worries” Boomers."
"Boomers willfully ignored or chose to not comprehend the concept of reversion to the mean."
I was accused of generalizations and scape goating when I said about the same thing in a comment...
So consumer expenditures have ticked up from $10.2 trillion to $10.3 trillion in two years in dollar terms. How much has the USD lost in terms of purchasing power over that same time frame? Perhaps consumption has actually fallen in real terms. Add to that an increase in population.
Maybe the US consumer is embracing austerity more than you give him credit for.
Great point. For the lower 75% of income, austerity is being thrust upon the US consumer, embrace (or even a kiss) or not.
If only I could find a video link.
http://tinyurl.com/28clhlg
Respect to Dog Day Afternoon, Blood Diamond
Retail has always been a credit-subsidized trick bag; good riddance to bad rubbish.
http://www.youtube.com/watch?v=wbSm5Bo5nxQ
3 simple words:
99 weeks, bitchez!
We'll "liquidate" your place while you're working that awesome dayjob, Fab Fab, thanks.
10% decline in retail spending is around 30% of retail spending. the rest (50% of the 75%) is healthcare expense. it's pretty bleak, but then again, normal spending is actually good for the economy because savings = future investment. love the correction, wade into it, buy lots of cheap investment stuff, laugh at inflation, and enjoy security and savings.
"People are tricked into believing that the lucrative jobs and expensive houses they acquire are due to their industry and talent when in fact they are the result of an over-printing of money. When the hot money cools off, the damage is uncovered, the jobs are revealed as unnecessary and the houses are unaffordable. Sometimes, central bankers can restimulate, and thus these intervals of misery have come to be known as recessions. But ultimately, the damage that is done to society and the economy is cumulative. Over decades, whole industrial swaths become dysfunctional. Entire industries rise up producing items that would not be necessary or would not find a foothold in a real economy." -The Daily bell
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