Businesses, Jobs Threatened by Sharp Drop in Consumer Spending

In an economy that depends more on consumerism than on production, the credit crisis means debt-burdened Americans are finding it harder to extract cash out of their homes or credit cards to finance their spending.

The services sector accounts not only for the largest share of Gross Domestic Product but also nonfarm employment in the United States — nearly 80 percent — according to the U.S. Bureau of Economic Analysis.

Retail, one component of the services sector, is the second largest industry in the United States in both number of businesses and employees, generating annually about $11,690 per capita. Small businesses, or single-store retailers, comprise 95 percent of all U.S. retailers.

In North Carolina, retail is a $90 billion industry and is the second largest employer with more than 650,000 jobs, according to the North Carolina Retail Merchants Association. In 2007, retailers paid more than $5.5 billion in sales and use tax, the second largest and fastest-growing revenue source in the state.

Sharp declines in consumer spending have sparked a rise in retail bankruptcies and store closings and a decline in retail employment. Even though Black Friday sales were stronger than last year’s sales, same-store sales in November fell by 2.7 percent from last year, the largest drop in 39 years, according to the International Council of Shopping Centers.

Store closings soar

In April 2008, RIS, a retail industry publication (www.risnews.com), reported that 6,000 retail store closings were expected by the end of 2008 and that retail bankruptcies and store closings already had jumped by 25 percent year over year.

Snopes.com and RIS highlight prominent retailers that have closed stores, shut down permanently, or declared bankruptcy. Among them are Circuit City, CompUSA, Linen & Things, Movie Gallery Stores, Foot Locker, Bombay Company, Wilson Leather, Zales, Sprint Nextel, Ann Taylor, Eddie Bauer, Talbots, KB Toys, and Dillard’s. Even Lowe’s, Home Depot, and J. C. Penney are delaying expansion or scaling back.

Data from SpendingPulse, a Mastercard unit, show that November’s year-over-year sales at apparel and department stores combined fell 20 percent, 24 percent at luxury stores, and 25 percent at electronics stores.

In a recent article on Yahoo! Finance, RBC analyst Larry Miller said, “Dismal spending trends at restaurants may be here to stay.” November data from a recent RBC survey of more than 1,300 consumers by ChangeWave reported that the only segment to see sales improvements in November compared to September was fast food. Among them were McDonald’s, Domino’s, Wendy’s, Taco Bell, and KFC.

The latest figures from the BEA show that consumer spending, which accounts for nearly 70 percent of GDP, plunged at the sharpest rate in 28 years during the third quarter of 2008. Consumer spending fell at a rate of 3.1 percent, the first decline since 1991, after increasing 2.1 percent in the second quarter, and real disposable personal income decreased by 8.7 percent in the third quarter versus an increase of 11.9 percent in the second.

The Bureau of Labor Statistics recently reported that November’s nonfarm payroll employment decreased sharply — by 533,000, the largest decline since December 1974. The figure is 71 percent greater than analysts had forecast.

Over the last three months, 1.28 million jobs have been lost, a figure that nearly equals the number of jobs lost during the 2001 recession. Employment in the services sector fell sharply. Only education, health care, and the federal government sectors had job increases.

In North Carolina, employment jumped sharply from 4.7 percent in October 2007 to 7.9 in November 2008.

Tax rebates, a $700 billion bailout package, and mortgage modifications have failed to stem the credit crisis, even as some economists are predicting that the next wave will be massive defaults on credit cards and auto loans.

Demand-side stimulus ineffective for sustained growth

“Tax rebates do not help the economy because they are government grants that are not based on encouraging productivity,” said Brian Riedl in a recent report from The Heritage Foundation.

The tax rebates from earlier this year failed to spur sustained economic growth, and findings from a National Retail Federation survey conducted by BIGresearch in May 2008 and data from a recent Internet summit illustrate why further tax rebates are unlikely to boost consumer spending, given that unemployment has since risen further and consumers remain mired in debt.

The survey confirmed that consumers planned to spend much of the rebate checks on necessities, with gas — 17.2 million people — and groceries — 21.2 million people — topping the list, with only 39.9 percent planning to spend the checks. Other ways consumers said they would use the money included paying down debt, saving, investing, and paying medical bills.

The trend in lower consumer spending was a theme that emerged from presentations and discussions at the inaugural Internet Summit 2008 conducted in Chapel Hill in November, where technology executives and thought leaders from some of the world’s leading technology companies along with venture capitalists provided insights into e-Commerce trends and the outlook for Internet entrepreneurship in these tough economic times.

The category with the largest decline in third-quarter sales in 2008 compared to the same period in 2007 was music, movies, and videos ( minus 29 percent), according to comScore. The biggest increase was in video games, consoles, and accessories — plus 60 percent. Sales of consumer electronics was virtually flat, at plus 1 percent, and computers, peripherals, and PDAs had no growth.

Too easy credit and push for home ownership

Some economists believe that the government’s policy of pushing home ownership, particularly among lower-income Americans, combined with easy credit made possible through historically low interest rates during former Federal Reserve Chairman Greenspan’s era led to the credit crisis.

“Historically attractive demographic groups have experienced major reversals of fortune,” wrote David Court in a December 2008 article in The McKinsey Quarterly. “The high spending rates of the boomers made them a sought-after and profitable customer segment,” but many boomers financed their spending by borrowing against their real estate and retirement account assets. “Depressed housing values and big losses in equities means many boomers face uncertain retirement prospects and can’t continue to spend as they once did.”

“The cheap credit of the past few years most likely won’t return for a long time,” said Lowell Bryan and Diana Farrell in a recent article in The McKinsey Quarterly. The range of potential outcomes is so large that many companies might not survive because of the uncertainty surrounding the global credit crisis and the global recession.

Massive government spending not only does not stimulate growth, it impedes future economic growth because it increases consumption at the expense of investment, said Riedl.

The $700 billion bailout package passed by Congress in October was supposed to buy up toxic assets from banks and financial services firm to stimulate borrowing and ease the credit crisis.

But many Americans and economists question why Congress continues to focus on preventing home foreclosures, when 58 percent of borrowers whose mortgages have already been remodified in 2008 have defaulted once again after only six months, according to Lender Processing Services. Even more alarming is that 25 percent of these borrowers end up delinquent after just one post-modification payment.

“We create wealth by inventing,” said Carl Schramm, CEO and president of the Kaufmann Foundation, a nonpartisan organization that promotes entrepreneurship, in a recent opinion editorial on CNN.com, “and then turning those inventions into viable products sold by American companies.” Government is not the answer.

Most economists agree that a vibrant small-business market, defined as companies under $10 million in annual sales, is essential for economic growth. In the United States, there are more than 27 million small businesses, most of which have only a handful of employees, according to 2007 U.S. Census Bureau data.

The Advisor, published by MasterCard advisors, said in a 2008 issue that small businesses spend $4.9 trillion annually, and “the net worth of the self-employed entrepreneur is five times greater than individuals who work for someone else.”

Yet analysts say these businesses and individuals would be negatively affected by President-elect Barack Obama’s plan to increase taxes on higher-income Americans.

Stimulus proposal neither bold nor new

In his weekly radio address and Internet video on Dec. 6, Obama promised to create or save more than 2 million jobs under his proposed economic stimulus plan by “making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s” (www.change.gov).

Obama said his nearly $700 billion plan will make public buildings more efficient, will invest in roads and schools, and will increase Internet access for schools and hospitals.

CNBC’s Larry Kudlow recently pointed out that the government already has spent $482 billion on nondefense infrastructure projects over the past five years through pork barrel and earmarks, and these projects have not stimulated substantial economic growth. This figure is more than half of what Obama proposes to spend in his “new New Deal.”

Riedl and other analysts point out that massive government expansion has been tried many times before, notably in the 1930s, 1960s, and the 1970s, and these policies failed to produce economic growth.

Taxing and spending the country into prosperity doesn’t work, said Dan Mitchell of the Cato Institute in a December 2008 interview with Kudlow. Middle-class tax cuts won’t stimulate the economy in the way that is needed.

“Economic growth requires increasing the productivity of American workers,” Riedl said, and “lower marginal tax rates encourage productivity by increasing incentives to work, save, and invest.” The greatest expansion the U.S. economy has enjoyed occurred in the 1980s and 1990s, when the federal government shrank by one-fifth as a percentage of GDP, Riedl said.

Pro-growth tax policies that provide incentives to invest and create private sector jobs, expansion of energy supplies, and a reduction in federal spending are the best drivers of a bigger economic pie for all Americans, not higher taxes, demand-side stimulus, or increased government spending, said Rep. Paul Ryan, R-Wis., and Bill Beach, director of The Heritage Foundation’s Center for Data Analysis during a hearing Oct. 20 before the House Budget Committee (see testimony).

Beach highlighted alternatives to current economic stimulus proposals that would boost the economy by improving business competitiveness in the global market, attracting new investors, and helping small business and corporations create more jobs. These options are (1) make the 2001 and 2003 tax cuts permanent, (2) implement accelerated depreciation, (3) lower the corporate income tax rates, currently the second highest in the world, (4) lower capital gains and dividend taxes, and (4) lower the tax rates on small business.

New taxes, increased regulation in N.C.

North Carolinians might well face higher state and local taxes once Governor-elect Beverly Perdue takes office. Ideas being discussed are a per-mile tax on vehicles to fund the state’s transportation needs, a higher highway use tax on car sales, increased registration fees, toll roads, and taxes on Internet purchases.

Even while consumers are asked to purchase more fuel-efficient vehicles, use more public transportation, and reduce their household energy and water consumption, lawmakers plan to increase their taxes as a reward for consumers’ frugality.

Karen McMahan is a contributor to Carolina Journal.