Summary
Lehman Bros' collapse was an epic earthquake that nearly destroyed the U.S. financial system. A year later, there are still aftershocks and the remainder of our financial institutions isn’t really that different. Clearly, we haven't learned much from the event, especially when it comes to economics and policy-making. Here's more.
Analysis
Tuesday may be a bellwether day for jewelry retailers, hopefully marking the end of worst sales year since the 1950’s. It was a year ago when Lehman Bros collapsed, dragging the entire US financial system down with it. Now, one year later, retailers are calendarising those dreary days where sales growth plummeted from single digit increases to double digit declines. Jewelers in particular were the hardest hit as sales decreased by as much as 35% for companies like Tiffany by year’s end. Mid market jewelry sales were slightly better. Companies like Zale reported holiday sales dropped about 18%, while Signet’s U.S. sales declined approximately 14%. Overall, jewelry sales decreased about 16% for the period between Thanksgiving and the end of December. Since then, jewelry sales continued to decline despite increased discounting and the historic sell-off of both branded and non-branded jewelry inventory.
In the spring, pessimism turned to optimism as sales declines briefly stabilized, only to resume their downward trend during the summer. In the interim analysts debated the effects of TARP on consumer lending, the consequences of the Stimulus package on consumer spending, and whether consumer’s attitudes had changed. That debate continues even as jewelers come up against last year’s numbers, which should mean future sales should turn decidedly better if the optimist’s view of economic policy is correct.
Still, even optimists have to admit the consumers are turning a decidedly ugly face toward spending, which may dampen any structural improvement in sales as jewelers confront last years large declines. For instance, according to a New York Times article, “consumers ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on record dating to 1943. Economists had expected credit to drop by $4 billion.” July’s results are particularly bothersome for investors and retail decision-makers because the data suggest at least two things are at work. First, there are new forces at play that could inhibit luxury sales growth for some years to come. Second, economists from all disciplines haven’t a clue about how the current economy working, which means policy makers, could have it all wrong.
While some still disagree, most business leaders, policy makers, and economists take it as fact that consumers are spending differently today. That view is supported, in part, by recent data released by the American Express Spending & Savings Tracker. It shows “there has been a shift in how consumers are expressing their wants and needs,” according to Pamela Codispoti, American Express SVP and general manager for card member services. Moreover, another research project that surveyed young and affluent adults as well as the general population “showed 40% planned to spend less in the next 30 days, while 60% said they would spend the same or more”. That’s the good news. The bad, “these consumer spending habits are being determined by what they consider wants versus needs. For example, while car maintenance jumped in priority by 37%, only 7% named vacations as high priority verses 25% last year”. Clearly, that kind of shift in attitude is bad news for the luxury industry, most especially fine jewelers.
Longer term, of greater concern to all retailers and investors is the strong likelihood that economic policy making has been reduced to mere guess work by the recession. Much like a controlled chain reaction gone bad, the Lehman Bros collapse and the subsequent financial meltdown unleashed new forces into 20th century economic space that current economic theory can’t explain. Writing Are Economists Completely Clueless?, Will Wilkerson says, “if individuals’ decisions about consumption, savings, and debt are rooted in beliefs about their future incomes — a view I think most economists share — then it would seem that an economy-wide decline in personal consumption would indicate that a lot of individuals have more or less simultaneously revised their expectations about their future economic prospects. As far as I can tell no one has a theory of the events that predict revisions in an individual’s estimates of her lifetime income, much less a theory of how the perception of events predicts the magnitude of these revisions. Nor have I encountered a story about how these revisions become coordinated and scale to the macro-level.”
Wilkerson goes on to say, “ I hear economists saying things about how easy money is needed to soothe investor worries, about how a surge of government spending is needed to quell consumer anxieties, about how the government’s “doing nothing” would cause people to panic and make everything worse, and so on. Do any of them have any idea what they are talking about when they say these things? I’m afraid they don’t.”
The conclusion according to some leading economists is that “economic theory, as it is practiced [today] is so far from consensus” that it is basically useless to policymakers beyond manipulating public opinion through the media. If true, “economists and by extension policy-makers are winging it”.
Contrary to revisionist history, New Deal economics didn’t revive America’s economy as much as it changed it. For he most part, the economy was neither better nor worse because of the New Deal, just different, which is a political and social distinction, not an economic one. The fact is it took the combined and continuous economic stimulus of WWII, the Marshall Plan, the Korean War, along with 23 years of pent up demand to rekindle America’s economy and ignite the next 50 years of economic growth.
By current measures, it’s an “inconvenient truth” for Americans that history is probably repeating itself. That current economic policy is really a tool best fitted for political leaders to change America’s social and political institutions in favor of something that is different, but not necessarily better, which today is a distinction that gets little play in the elite media. In the end, the scariest thing for most American’s is the harsh realization that despite our overwhelming wealth, science, technology, and military power, we are really not in the driver’s seat. That future growth will likely be the unintended consequence of any number of smaller political events, or a single large one for that matter that are beyond are control.
Nicholas White consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
