This Is a Clear Sign the U.S. Economy Is Struggling Lombardi Letter 2017-10-05 12:24:43 u.s. economyretail sectors&p ratingshousingmillennialsdebtconsumer confidence Many U.S. retailers are struggling. The S&P has rated many companies as junk status but the problem is that the U.S. economy itself is struggling. 2017,News,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2017/10/U.S.-Economy-150x150.jpg

This Is a Clear Sign the U.S. Economy Is Struggling

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U.S. Economy
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Retailers Are Going Bankrupt as U.S. Economy Struggles

The U.S. retail sector can “proudly” boast of having sunk deeper into junk status. S&P continues to stamp U.S. retail companies with the unenviable rating of CCC. Over a fifth of American retailers and restaurants are too risky to obtain decent credit—because they have too much debt. (Source: “Stressed retail industry plunging deeper into junk territory, S&P says,” CNBC, October 2, 2017.)

Suffering retail indicates a more chronic problem; the U.S. economy itself is suffering.

A CCC rating suggests that a company’s debt securities are no longer reliable. Therefore, the company would be unable to pay that debt back, especially in the case of unfavorable economic conditions. The number of U.S. retailers enduring the dubious CCC rating has doubled since the beginning of 2017. (Source: Ibid.)

Thus, retailers have not yet found a way to respond to the changing patterns of the American consumer.

In 2017, U.S. retailers have been shutting down at an unprecedented rate. The situation reflects the fact that major retail and distribution corporations are struggling.

The “optimistic” interpretation is that the physical retailers have simply become too expensive to compete against e-commerce. Thus, as online shopping expands, brick-and-mortar shops become the increasing target of bankruptcy cases.

In September, the once-proud worldwide phenomenon Toys “R” Us Limited joined a growing list of popular shopping brands into the dust. The toy retailer has joined Aéropostale, Sports Authority, American Apparel Inc (OTCMKTS:APPCQ), and Payless Inc (NYSE:PSS)—to name a few. As for the CCC rating, you can count Neiman Marcus Group Ltd LLC among those unfortunate enough to have earned it.

The Optimists Have Deflected the Argument Away from the U.S. Economy

Thus, the optimistic explanation holds that inefficient retail chains have failed to adapt to the new technology and that’s why they’ve started to lose customers. Yet, the optimistic view ignores the bigger likelihood that stores are actually being forced to close because the U.S. economy is weak. People simply have less disposable income for shopping and dining out.

There is a sensation that overall confidence in the market, and therefore in the U.S. economy, has dropped. The retailers that are failing are, after all, some of the best known in America. They have had online operations alongside their physical locations, yet have still struggled. Perhaps the better explanation is that regular people—if not investors, apparently—don’t feel confident enough about the economy to go shopping.

Consumer confidence in the U.S. dropped in September. The University of Michigan published a report saying that the consumer confidence index plunged to 95.1 points in September. To understand the drop from 96.8 in August, consider that consumer confidence was at a three-year average of 105.3 in the boom years of 1997 to 2000. (Source: “Consumer sentiment declines more than expected in September,” CNBC, September 29, 2017.)

The percentage of U.S. consumers expecting an improvement in the economy is dropping. Just like the CCC-rated companies, too much debt may be the reason. Millennials, for example, aren’t buying homes. They simply can’t afford them because they’re struggling with massive amounts of student debt. (Source: “Student Debt Is a Major Reason Millennials Aren’t Buying Homes,” Bloomberg, July 17, 2017.)

Regardless, the U.S. economy is weakening. The International Monetary Fund (IMF) noted that growth had picked up in many parts of the world, but not the U.S. or the Brexit-ridden U.K. (Source: “IMF: U.S. growth will slow by 2020, not rise to 3%,” CBS News, June 28, 2017.)

Simply put, consumer confidence expresses an inclination to spend and take on debt. Some say that Hurricanes Harvey and Irma contributed to the pessimism, but the consumer confidence problem has longer legs. It suggests that Americans’ lack of confidence is in the U.S. economy itself.

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