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Well, the recession must be over…

I say this mostly in jest, of course.  Though I did start to wonder this weekend when I couldn’t find a parking place at the local outlet mall.  Patrons were parked in the grass, behind the dumpsters, and on the medians — which was odd given that it wasn’t a holiday weekend, the Christmas season is still a few weeks away, and there were no major sales to speak of.

The weak dollar has had its benefits for South Florida.  Though the local economy has been in the tank (one of the worst in the country) the relative weakness of the dollar has encouraged foreign tourists to frequent the area’s many high-end outlet malls.  But this past weekend, it was only the familiar Chicagoland and New Jersey snowbird accents that could be heard.

Even stranger was the fact that this increased mass of people were pursuing a diminished stockpile of goods that are now selling at much less attractive prices.  The phenomenal sales of a year ago are no longer to be found, and neither is the selection.

So…is this is?  Is the recession over?

It may (or may not) technically be over, i.e. the economy might well be growing from the low levels reached earlier this year.  But it is certainly not back to its former state of health.

Most retail stores are no longer having the blow-out, inventory-clearing sales they did a year ago.  This is because that excess inventory has largely been sold…and it hasn’t been replaced.  The stores have all downsized their inventory levels to reflect the new reality, the “New Normal.”  With inventory levels now roughly in line with lower, diminished consumer demand, prices have stabilized, though they probably won’t be rising any time soon.

It is not possible to sustainably grow profits without top-line sales growth.  Most of the profit growth we see today is due to cost-cutting, which–while certainly not a bad thing–is not sustainable indefinitely.  So, until consumer demand mounts a serious offensive, retail sales and profits growth is likely to remain tepid at best, and new investment will be close to nil.

The Christmas holiday shopping season should be interesting to watch this year.  We expect to see firmer prices this year relative to 2008, but this is by no means a given.  Once consumers get used to lower prices and the culture of discounting, it’s difficult to break them of that.  The US automaker, for example, never really recovered from the 0% financing lunacy of the early 2000s in which their pricing power went about as low as the interest rate.   We shall see what becomes of the retailers this quarter.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy