Monday, April 14, 2008


Consumer lead recession

Since consumer spending is north of 2/3rds of the U.S. economy the slowdown in spending is having dramatic results in retailing. (Registration required.)

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117 and the jeweler Zales will close 100.

Add to this the credit crunch.

Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.

So the retailers are getting squeezed by lower sales and higher interest costs, if they can find someone willing to lend them money, it is no wonder that they are closing stores feeding the vicious cycle of higher unemployment and less spending. Ultimately, this is what deflation looks like. Now if we can only get the stock market to cooperate. (Sigh.)

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