Retail Apocalypse Hits Minnesota - Why?

The retail apocalypse continues its rampage throughout the country and next to be hit the hardest may be Minnesota. It has come to my attention just recently that Minnesota based outdoor retailer Gander Mountain will be closing just under half of its 126 stores. The rumor that all the stores were closing was put to rest by the celebrity entrepreneur Marcus Lemonis, who bought the chain after it had filed for chapter 11 earlier this year. This trend of store closings throughout the country is not new since a long list of retailers have been closing stores for several years. Some only a dozen, while others, like the zombie Radio Shack closed 1,784 stores recently.

The retail apocalypse is a term coined back in about 2015 to describe the trend of brick-and-mortar retail stores starting to close their doors. Thousands of stores have met their end in just the past few years alone. Notable names on the list are Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Barnes & Noble, JCPenney, Macy’s, Office Depot/Office Max, Pier One, Radio Shack, Sears, Walgreens, and even discount retailer Dollar Tree/Family Dollar are struggling. These are just a few of the larger more recognizable names.

In 2015 Target’s Canadian subsidiary filed for bankruptcy after its aggressive expansion into the country failed. The result was a closure of all 133 stores. Perhaps unrelated were the 1,700 layoffs from the Target Corporate office here in Minneapolis just a few months after the closure of Target Canada, the layoffs represented 13% of its corporate staff.

For those not aware, retail is a major pillar of the Minnesota economy. Both Target and Best Buy had their start in Minnesota and have their corporate offices located in Minneapolis / Twin Cities area. Minnesota is also home to the Mall Of America which is currently the largest mall in the country. Minnesota has for a long time enjoyed an unemployment rate currently 3.4%, as compared to the much smaller national average of 4.1%. If this retail apocalypse trend continues, it could spell disaster for the state’s economy. Minnesota’s last saving grace is the health care industry in which it also has several local companies including the prestigious Mayo Clinic. But as you may be aware, this industry may be facing several changes soon with President Trump’s plan to repeal (and hopefully not replace) the Affordable Care Act passed by Obama.

Let’s go over why these things may be happening. Since the financial debacle of 2008 our economy has been in a “recession” which supposedly has ended according to rhetoric that you will hear constantly on the financial channels. This is in spite of the fact that the Federal Reserve is still technically suppressing interest rates to “emergency” levels. According to the Fed’s data, the economic contraction ended in about 2009 when they started their Quantitative Easing program (money printing) in order to “stimulate” the economy. The program was designed to put money into the hands of consumers by purchasing bad debts and unloading them off the balance sheets of the major banks, therefore freeing up credit. Credit is important to have available in the US economy since it is addicted to it, much the same way an addict is to heroin.

Ever since US manufacturing left for China, the US has become a consumer-based, service sector economy. This means that economic productivity is created from services rather than manufacture of tangible goods, in turn the US must now import the goods it wishes to consume. And in the case of retail, it is the service of selling these imported goods to the US consumer. The US is the seller and the consumer, but not the producer of these goods. Without the consumption of the foreign made goods, the US economy suffers from rising unemployment, lower wages, etc.

It was the Federal Reserve’s intention to keep the American economy going by encouraging consumption. Let us look at how they did. Michael Snyder, in an article that I will link to below, describes the Federal Reserve’s failure to keep the money velocity high. The money velocity is a measurement of how many times money changes hands in an economy. When the velocity is high, the economy is doing well since a consumer’s money is moving. When the velocity is low, the economy is not doing well. Snyder points out in the graph below that the money velocity is at the lowest point since the data has been recorded.

This chart is an indication that the Federal Reserve has not been able to hit its goals in stimulating the economy and also may be an explanation as to why they can’t hit their inflation goals either. Why is it that the money expansion through the Quantitative Easing program did not work to get the economy going? Because there is no law in economics that states that: because you give someone money, means that they are going to spend it. It was the Fed’s hope that consumers would spend the money that they acquired from the stimulus program, but there are two other things that people can do with money. They can save it in the bank, or they can use it to pay down debt. And since the person savings rate of the average American is at a 3 year low, Americans must be paying down debt. Using money to pay down debt is deflationary; it does not stimulate the economy because it only decreases the amount of credit that the banks created.

The Fed was successful in doing something else. It was successful in creating an asset bubble in the stock market. Because investors no longer earn a yield in the bond market (because the Fed kept interest rates low), the investors instead put their money into equities (stocks). The Dow Jones Industrial Average since the start of the stimulus program has gone from around $9,000 in 2009 to over $21,000 today. All the money that was intended to be dispersed into the US economy for economic growth went into the equity markets.

It is evident that a failure in monetary policy, not online retailing, is the reason why retailers have not been hitting their sales targets and are being forced to close their stores. We can expect more bad economic news from this sector including the retail sales report released just this past Friday from the Commerce Department that shows sales declining 0.2% this past June versus the projected increase of 0.1%.

But going forward, if anyone tells you that a record high stock market is an indicator that the economy is doing fine, you have my permission to laugh at them.

Sources:

Gander Mountain closing all store. Indystar. May 6, 2017. http://www.indystar.com/story/news/fox59/2017/05/06/gander-mountain-closing-all-stores/101389760/

Snyder, Michael. More Than 6,000 Major Retail Stores Are Closing. May 2, 2015 http://freedomoutpost.com/more-than-6000-major-retail-stores-are-closing/

Pigg, Sussan. Target pullout leaves condo project in the lurch. January 15, 2015. https://www.thestar.com/business/real_estate/2015/01/15/target-pullout-leaves-condo-project-in-the-lurch.html

Ramstad, Ewoldt, Painter. Target layoffs will hit 1,700 today, with another 1,400 jobs going unfilled. March 11, 2015 < http://www.startribune.com/target-layoffs-will-hit-1-700-with-another-1-400-jobs-going-unfilled/295752841/>

Minnesota Department of Employment and Economic Development. State and National Employment and Unemployment. [current data July 16, 2017] https://mn.gov/deed/data/current-econ-highlights/state-national-employment.jsp

Great Recession. Wikipedia. July 16, 2017. https://en.wikipedia.org/wiki/Great_Recession#United_States_policy_responses

Appelbaum, Binyamin. Federal Reserve Caps Its Bond Purchases; Focus Turns to Interest Rates. New York Times. October 29, 2014. https://www.nytimes.com/2014/10/30/business/federal-reserve-janet-yellen-qe-announcement.html

Snyder, Michael. The Velocity Of Money In The U.S. Falls To An All-Time Record Low. June 1st, 2014 http://theeconomiccollapseblog.com/archives/the-velocity-of-money-in-the-u-s-falls-to-an-all-time-record-low

US retail sales drop 0.2% in June vs 0.1% increase expected. CNBC. July 14, 2017. http://www.cnbc.com/2017/07/14/us-retail-sales-june-2017.html

Graphs:
Velocity of M2 Moneystock [ibid – Snyder]
https://fred.stlouisfed.org/series/DJIA/
https://fred.stlouisfed.org/series/PSAVERT