Retail investors had a rough go of things in the first half, but since the March lows of all the markets, the Standard & Poor’s Retail Index is showing progress toward its 52-week high of 427.13.
But don’t expect that to last. A slump in consumer spending and soaring unemployment could both pose a significant threat to retailers going into the 2009 holiday season.
The U.S. unemployment rate hit 9.5% in June and could eclipse 10% by the end of the year, sending the economy into a "jobless recovery."
In a speech to Congress on May 9, Federal Reserve Chairman Ben Bernanke cited a lack of consumer spending could serve as a constraint on hiring. This could create a paradoxical effect as employment obviously plays a key role in consumers’ spending habits.
Even for the employed, the lessons learned from the worst economic downturn since the Great Depression will resonate with consumers. That has already been evidenced by the U.S. savings rate, which has climbed above 4% for the first time in more than a decade.
In addition to taking money out of the hands of potential customers, soaring unemployment could lead to higher lending standards. As unemployment rises, so too will credit defaults and the cost of credit will increase accordingly.
In the past, consumers have counted on attractive financing promotions for the purchase of big-ticket items such as high-definition televisions and kitchen appliances. But that won’t be the case with tighter credit
"Consumers were also able to spend more because of the easy availability of credit, most notably through mortgage equity withdrawal and they responded by buying more items," said Deloitte Strategic Advisor Richard Hyman. "These conditions underpinned retail growth for the past 10 years but have now disappeared. However, it’s worse than that. They will clearly not return once the recession is over."
Of course, tighter credit isn’t just a problem for consumers.
A Brick & Mortar Inventory Crunch for the Holidays?
The potential bankruptcy of commercial lender CIT Group Inc. (NYSE: ) could be a major tipping point for businesses that rely heavily on credit. Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE: ) and Target Corp. (NYSE: ) rely on CIT for factoring – an old form of finance in which the lender pays the vendor for its accounts receivable.
