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The credit crunch comes to the mall

Add the prospect of retail job losses to an already sour economic picture.

By Colin Barr, senior writer
Last Updated: July 30, 2008: 3:59 PM EDT

Consumers are shopping less, which is more bad news for the sputtering economy.

NEW YORK (Fortune) -- The credit crunch isn't just for Wall Street anymore.

Penny-pinching consumers are skipping the mall, as big bankruptcy filings this week attest.

While the failures of the Mervyn's department store chain and Bennigan's and Steak & Ale casual restaurants may seem mundane - there are other places to get a chicken pesto panini - they're more evidence of a consumer pullback that poses still another threat to an economy hampered by a loss-soaked banking sector.

Despite the earlier predictions of economic policymakers and other Pollyannas, sliding housing prices and the surging cost of energy and food are clearly hitting the consumer. PNC's Household Stress Index is above its levels of the 2001 recession and approaching its 1990 highs.

Those stresses are showing up in the service sector. Besides the news from Bennigan's and Mervyn's, in recent weeks Starbucks (SBUX, Fortune 500) and Talbots (TLB) have announced cutbacks, and discount apparel chain Steve & Barry's filed for bankruptcy.

In May, household goods seller Linens 'n Things filed for Chapter 11 protection. In February, retailers Wickes Furniture, Sharper Image and Lillian Vernon all sought refuge from their creditors. Along with slowing sales, the struggling retailers have been hit by heavy debt loads that became more onerous to service as profits plunged.

Strong headwinds

The resulting job losses come on top of the hefty cutbacks already seen in the airline and auto businesses, as well as in the financial services industry. And the job cutting isn't done yet in those sectors, meaning even more downward pressure on consumer spending is still to come. Consumers are the source of more than two-third of U.S. economic activity.

"For households right now, the headwinds are very strong," says Joel Prakken, chairman of forecasting firm Macroeconomic Advisers. Though oil prices have dropped sharply over the past month, Prakken adds that they remain sharply above year-ago levels, which suggests "we haven't yet seen all the negative effects of energy price increases."

Prakken made his comments as ADP released its monthly employment report, which showed the private sector adding 9,000 jobs last month in its latest anemic showing.

Government data showed that the economy lost 468,000 jobs over the first half of 2008, and forecasters expect employment growth to remain weak at least through the end of the year. Prakken says he believes coming months will show "sluggish growth, if not outright declines" in employment.

Cutbacks and more cutbacks

The greatest job losses continue to center on the construction and manufacturing sectors, which have been shedding workers continually for almost two years. The latest cutbacks in the auto industry, where Ford and General Motors (GM, Fortune 500) have been hammered by soaring fuel and steel prices, have further dimmed an already gloomy employment outlook.

But other belt-tightening is under way at airlines such as United Airlines (UAUA, Fortune 500), which is cutting jobs to offset the soaring cost of flying its older jet fleet, and American Express (AXP, Fortune 500), which recently warned that reduced consumer spending and soaring bad loans would hurt 2008 profits. Respondents in the Conference Board's July consumer confidence report said for a fifth straight month that jobs were harder to find.

"What really caught our eye was the continued deterioration in the labor market measures," wrote Merrill Lynch economist David Rosenberg in a report earlier this month.

A look at other numbers suggests that unhappy trends have been building for some time. Adjusted for inflation, retail sales dropped 2.6% from a year ago in the second quarter, marking their third straight quarter of contraction, according to Northern Trust economist Paul Kasriel.

Meanwhile, personal bankruptcies rose 30% from a year ago in the first half of 2008, according to the American Bankruptcy Institute, while business bankruptcies were up 39% in the first quarter, the latest available data.

The trends are ominous as investors consider the prospects for the end of a year that so far has seen the collapse of Bear Stearns, IndyMac and Countrywide and the near collapse of Fannie Mae and Freddie Mac.

"If there is one thing that investors have learnt over the past year, it is that it is impossible to have a strong real economy while the financial economy is ailing and the monetary transmission mechanism is broken," wrote economist Lena Komileva of inter-dealer brokerage Tullett Prebon. "If there is one thing that investors have learnt over the past two decades, it is that it is impossible to have a strong financial economy while the real economy is ailing."  To top of page

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