Monday, December 06, 2004

Stage One of the Great Collapse begins: low-end consumers are being purged from the market by persistent unemployment, underemployment and falling real wages.
The recent spate of sales figures and job numbers underscore an emerging picture for the economy: the gap between the haves and the have-nots is widening amid a draining of the middle-income ranks.

"The longer-term pattern is that the rich are getting richer," said Standard & Poor's Chief Economist David Wyss. "It's not so much that the poor are getting poorer, but there's a hollowing out of the middle class." . . .

It is no secret that consumers have spent much of the year as a divided bunch. For months now, sales at luxury retailers such as Neiman Marcus, Saks Fifth Avenue and Nordstrom have far outpaced their cheaper knock-offs such as Lord & Taylor and Sears Roebuck & Co..

And the discount segment -- the recession's savior for consumer spending -- has seen its fortunes swing in recent months to the downside. Wal-Mart Stores may well have touched a trough last month when sales at stores open longer than a year -- a key industry metric known as same-store sales -- rose an embarrassing 0.7 percent, despite the inclusion of what was supposed to be a post-holiday rush.

On Saturday, Wal-Mart reported another round of results suggesting sluggish sales, a harbinger that the holiday season may be in bigger jeopardy than anyone thought. . . .

it became clear on Thursday when the rest of the discounters released their numbers that though Wal-Mart may be at an operational crossroads, there is something bigger going on out there.

On Thursday, the nation's largest chain stores cumulatively tallied a lackluster 1.7 percent gain in same-store sales -- the worst showing since August. BJ's Wholesale Club, Big Lots, Dollar General -- even Costco Wholesale Clubs -- missed Wall Street expectations for same-store sales for the month, some by very wide margins. . . .

And there are signs of the great divide elsewhere: Ford Corp. and General Motors Corp. both saw sales retract in November -- mostly at the wheels of older designs -- and promptly trimmed production of certain models. At Ford, for example, sales of the Ford Focus plunged 39 percent . . .

On a conference call with analysts Thursday, GM's Paul Ballew, head of market and industry analysis, said that "growth in trucks and at the luxury end of the market is coming at the expense of some of the traditional car segments. . . .

For the third straight month, manufacturing -- the bread and butter of the middle- to lower-middle class -- lost jobs, exclusively in the higher-paying computer product and auto production segments.

After significant job gains from February through May, manufacturing employment has not moved, according to the Labor Department.

As disconcerting was the loss of 16,000 retail jobs last month -- a time when retailers are typically staffing up for the holiday shopping period.

But average hourly earnings rose 1 cent to $15.83 in November, making for an annual increase of 2.4 percent, while the average work week dwindled for the first time since August.

"We're seeing a small percentage of the population getting a larger percentage of the income," Northern Trust's Chief Economist Paul Kasriel said. The "real incomes" of the Wal-Mart demographic "are not growing," he said.
At some level, it doesn't matter how much China, Japan and the Europeans support the dollar, or how much deflation East Asia can generate from its productivity gains and its ultra-cheap workforce. With falling real wages for the Wal-Mart set combined with above average inflation in nontradable sectors like housing, medical care and even food (mostly nontradable for the US at least) and I bet even rising payroll deductions, there eventually comes a point where it doesn't matter how cheap that DVD player from China is. No money to spend is no money to spend. Even credit is starting to dry up (I would call 40% monthly interest charges "drying up") for those at the low-end of the income scale and the high-end of the risk scale.

So should we expect to see Wal-Mart offering installment plans on those $15 DVD players? How about no money down, $1/mo. for 15 months plus, say, 20%?


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