Meet the Street: It'll Be a Blue Christmas for Retailers

Though the recession isn't yet official, the U.S. economy continues to weaken steadily.

Carl Steidtmann chief economist, Deloitte Research

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More than 1.6 million jobs have been lost through the first eight months of 2001, and job losses likely will keep mounting through the end of the year. As the pain of unemployment spreads, retailers have hunkered down for difficult times and are prepared for a weak Christmas season, says Deloitte Research Chief Economist Carl Steidtmann.

We talked to Steidtmann about his forecast for consumer spending in the face of a recession, as well as his broader economic outlook. Despite all the near-term gloom, he says he expects a recovery as soon as early 2002.

TSC: You've said consumer confidence doesn't tell us much about what to expect in consumer spending. Why do you think it's not important?

Steidtmann: I think the basic premise we've always had is that you can't think yourself into a recession. If you look at the relationship between consumer confidence and future consumer spending, there's not much relationship at all. If you do a statistical analysis of the relationship between future expectations and what consumers actually do, there's a fairly large variance. The fact of the matter is people spend the cash in their pockets.

What we look at are the factors that affect household cash flow. We have seen that home mortgage refinancing has been pretty strong, driven by lower interest rates. If you're looking for a bright spot, that would be it.

We've also found that significant changes in energy prices can have a very positive effect on purchasing. We've certainly seen prices come down since the first of the year, and that frees up money to get spent in other categories. The expectation is that prices will continue to fall over the course of the next six months. That also would be mildly favorable.

The big negative, however, is obviously employment. Between now and the end of the year, [we may see] the loss of another half a million jobs.

Really, that more than anything is setting this Christmas season up to be one of the worst in memory. We were well on our way to having a very poor Christmas before the terrorist attacks. Most retailers have been very aggressive in keeping their inventories under control. This year there will be strong promotions before Christmas, but not nearly as much after Christmas, simply because there won't be the same degree of inventory.

TSC: Which retailers would you expect to hold up relatively well in a recession?

Steidtmann: Discounters fall into that category. Grocery stores tend to do pretty well -- we see a real shift from eating out towards eating at home. Drugstores do well because people tend to get sicker in recessions. Value stores, off-price retailers all do well. Then I also think some of the home improvement retailers. The different nature of this recession certainly helps the housing sector.

TSC: How is this recession different from those before?

Steidtmann: In the past, [most] recessions have really been demand-related where there were excess amounts of demand, with the Fed raising interest rates to dampen it. But this is much more from the supply side, with the Fed doing everything it can to stimulate demand. The only way to do that is by lowering interest rates. That makes housing and big-ticket items more affordable. That has held up housing and more home-related retail.

TSC: Before now, when was the last time we had a supply-oriented recession?

Steidtmann: The Great Depression is the last example of a supply recession. Most of the recessions in post World War II have been demand-related, though some would argue the 1990-91 recession had a supply aspect because of the savings and loan phenomenon. In 1958, a recession was somewhat supply-oriented. There was overbuilding in the auto industry that led to pullbacks in auto production. It was a much bigger segment of the economy back then. And then in the 1944-45 recession, as we made the transition from a war economy to peace, there was a supply-side recession.

TSC: You've written that we could start to see an economic recovery in early 2002. But given the analogy you've made to the Depression, that seems pretty quick.

Steidtmann: This period of economic slowdown and recession really began in March 2000. In that context, we've been in this 18 months already.

Had we not had terrorist attacks, we would have expected this to last much longer. And since Sept. 11 we've had a real change in government policy, with a continued reduction in interest rates and a very aggressive [injection] of liquidity into the banking system, and a very sizable stimulus, both in [proposed] real tax reductions and in spending on the part of the government. I think that's going to be the catalyst for recovery.