As the calendar gets ready to turn to 2013 and the possibility of falling off the “fiscal cliff” seems to be all but a lock, households and businesses are struggling to find certainty about how the economy will look in the new year. The uncertainty is mounting and consumption is dropping, which is no formula for positive economic recovery. As this spending declines, it could cause an overall pullback across various business areas, especially the retail sector.
There has been recent data suggesting holiday sales were extraordinarily sluggish, reaching three-year lows. While there are many factors involved with the decline in holiday spending, including the aftermath of Superstorm Sandy on the East Coast and the national mourning of the recent events in Newtown, CT., many analysts point out that concerns over the employment situation and “fiscal cliff” worries are the driving factors that caused consumers to curtail spending and ultimately save a little bit more this holiday season.
This data and analysis, in addition to the recent report of a 6 point drop of Consumer Confidence Index from 71.5 to 65.1, just adds to the argument that consumption is declining. This lack of consumption is a recipe for economic pullback as the capitalist nature of the United States economy is driven by consumption. A majority of business sectors will face the effect of this lack of spending. However, one sector will probably be disproportionately effected by the decline in consumption and that is the retail sector.
As consumers decide to save more and spend less, businesses that cater to consumers doing discretionary shopping will see a decline in traffic in their stores. Firms that struggled in 2012, like Best Buy (BBY), JC Penny (JCP), and Kohl’s (KSS), will probably see even a greater decline in growth in the new year while more well established companies like Macy’s (M) will also start to see a drop in growth. Some analysts even suggest that discount chains like Wal-Mart (WMT) and Target (TGT) will experience some pullback due to an overall decline in the industry despite their cheaper prices.
Now, even if there is a New Year’s miracle and Congress and the President come together with a deal to avert the “fiscal cliff,” it does not necessarily mean that the economy’s potential 2013 troubles will go away. While a resolution will bring about some certainty on the short-term future of the economy, many consumers might still have reservations about doing too much spending as the job situation recovers slower than expected. Despite the unemployment rate currently at 7.7% (down from 8.7% a year ago), there are concerns about the amount of people leaving the labor force due to discouragement from lack of employment opportunities, the relative stagnation of wage growth, and the amount of part-time workers. Additionally, workers and consumers are concerned about the job situation looking forward as the implementation of the Affordable Care Act rolls out, which might reduce workers’ hours and result in employers laying off workers. All of this uncertainty adds to consumers worries; there is a constant threat of another recession instilled in the back of their minds.
With all of these worries, retailers face the potential pullback regardless of a “fiscal cliff” resolution, especially those that have seen recent struggles. Investors must make intelligent decisions in deciding what position to take in retail companies as the calendar turns.
The Bottom Line
The lack of confidence in the economy and the policymakers in Washington is causing both consumers and various business sectors to panic. Not only are households and businesses pulling their hair out, but this overall situation is causing investors to do more homework to decide where to put their money. If consumers end up cutting their spending, the retail sector will not be a winning play for investors as it will probably see the most negative decline in 2013. Just because economic decline might occur, it does not mean investors should pull out of the markets with concerns of losing it all. Making smart investment decisions can build up wealth despite the incompetence of the powers that be in Washington.