A “Boots on the Ground” View of the Economy

When people talk about the economy these days, it’s easy to get wrapped up in numbers and data.  Just take a look at market activity on days when the BLS Unemployment figures comes out.  The hand-wringing.  The pontificating.  It’s enough to make your head hurt.

And it completely misses the point.  The economy is about people.  It’s about their lives & livelihood.  The choices we make about those issues are merely reflected in the data we twist, strangle, and well, possibly waterboard and apply electroshock therapy to.  It pays to get out of the office and actually see what’s going on.  So on that note, I went (somewhat belligerently at first) to the Southern Christmas Show.

The show is an annual event here in Charlotte, NC.  This was only my second time going, but my purpose was two-fold: 1) Do some research for friends who are starting their own artisan businesses. 2) Take the pulse of the holiday shopping season.

Judging by the pictures, you wouldn’t think you were looking at a down year.  But it is a down year for the show.

I have to admit, it was easier to get around and see booths and vendors than I thought it was going to be.  But I only had one other year to compare it to whereas my wife had decades.  So anecdotally, we’ll note foot traffic is down.  Having said that, foot traffic tended to be concentrated around a select few vendors. Belk department stores had a huge amount of floorspace and a lot of the traffic was dominated by them.  Pareto efficiency in action.

Another thing worth noting: huge markdowns, discounts, and excessive inventory.  Vendor after vendor was offering their merchandise at steep discounts.  About the only ones who weren’t following along?  Food vendors, because they don’t have to.  When you put on a craft show like this in a convention center/merchandise mart, you have a captive audience when it comes to concessions.

Regarding the inventory: some of the vendors we heard talk about sales being lackluster or dismal.  One vendor we bought from said that on the previous day, Thursday, they only sold 3 items with the first sale coming after 5PM.  It was also interesting to note when we made our purchase from the same vendor, they had to go to their truck where they kept the bulk of their inventory to pull it.  Doesn’t seem like something to note, until you put that little observation together with what they said happened the day before.  My interpretation?  Sales volume/churn was much slower and lighter than they thought – they’re bloated with inventory.

Which leads me to the real question: if vendors like this are bloated with inventory, reducing prices at every turn to try and generate traffic and interest, what will more credit do for them?

Try pushing them over the cliff:

Trying to give businesses bloated with inventory more credit is tantamount to saving a drowning victim with more water.  It won’t help and it will kill them.  Businesses in this situation don’t need more credit, they need less.  They need to liquefy their balance sheet as best they can, as s0on as they can.  Yet Secretary Geithner, says credit access is the key to expanding our economy and we need to ensure credit is flowing.

Which brings up the latest Federal Reserve Senior Loan Officer Survey results:

Domestic banks indicated that decreased originations of term loans and reduced draws on revolving credit lines were generally more important sources of the declines than paydowns of outstanding C&I loan balances. More specifically, decreased originations of term loans and decreased draws on revolving credit lines were cited by 45 percent and 30 percent of banks, respectively, as “very” important sources of the decline in C&I loans this year.

Or if you prefer the chart, here it is:

Loan demand is collapsing, just not as fast as it was before.  The point is, with the uncertainty in the macro backdrop, the obvious slack and excess capacity in the economy now, there’s no way I’d expect a bank to make a loan right now.  And if it did, I’d expect the terms to be really tough.  Yet Geithner says we need to do the opposite.

I have nothing but contempt and loathing for Tim Geithner.  In an upcoming post, I’ll dissect a speech he gave in 2007 at a conference I attended and give you the play-by-play to what I can only describe is a total mental train wreck.  To say I think his thought process is misguided is unfair to misguided thought processes.

At any rate, what does my “boots on the ground” view show me?  Small businesses need customers, not credit.

And the customers are going to be few and far between with tight purse strings.

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Filed under macro, Markets, Monetary

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