Friday, February 08, 2008

Time to call the recession yet? 

As I wrote a couple of weeks ago, a call on a recession requires you to look at indicators of each of the three ways we can measure aggregate economic activity -- employment, sales, and income. On two of the big three places now, we have the first sign that a downturn has begun.

Following on the weak jobs report last week, retailers are turning in poor sales reports for January.

Retailers turned in their worst monthly sales results in nearly five years, and big chains appeared to be girding themselves for a prolonged slowdown in consumer spending by announcing plans to close hundreds of stores and cut thousands of jobs.

Even gift-card redemptions, which were expected to give January sales figures a bigger lift, instead offered a glimpse at just how strapped consumers are. Wal-Mart Stores Inc. yesterday noted that redemptions were below its expections, and said consumers were holding onto the cards longer -- or using them to buy groceries rather than treats like electronics.

Wal-Mart's same-store sales rose 0.5% in January compared with a year earlier, far below its expectation of a 2% gain. For the fiscal year ended Feb. 1, Wal-Mart's U.S. same-store sales rose just 1.4% -- the lowest increase since the company began releasing such data nearly 30 years ago.

In the retail sector's overall results, sales at stores open at least a year, a key measure of performance, rose just 0.3% in January, below widespread expectations of a 1% gain, according to an index released yesterday by Thomson Financial. Half of all retailers tracked by the index turned in sales that lagged analysts' expectations.

Other chains reported similar results -- Costco was up 3% after deducting higher-priced fuel sales, Macy's was -7% after expecting to be +4%. (That had to contribute to the decision yesterday to close its offices in Seattle and the Twin Cities.) Retailers did not order as many goods for the holidays, leading to a 1.1% increase in wholesale inventories in December. Mish thinks people are hoarding their gift cards -- which would put some evidence against the idea that people are expecting higher inflation.

Add to this the report that credit-card delinquencies are up, and you have a recipe for lowering retail spending for the first half of the year.

So the jobs market seems to be in some trouble -- some of the data confounded by the presence of many ex-self-employed in the pool of unemployed workers -- and now retail sales is following suit. We should look for confirmation in the chain stores sales figures due on Tuesday and January retail sales report due Wednesday next week. The third leg of the stool on this, income, will not report for January until 2/29. I might not wait that long to decide the recession has begun, but I want a little more data yet.