John DVLately, retail has been on my mind. When I am traveling or out shopping with my wife (I don’t buy anything but she sure does!) I love to people-watch and see what they’re up to. I see a lot of people walking around the mall but not too many arms filled with shopping bags. Maybe they’re there for the exercise.

Last week I talked about how Wal-Mart is a great economic indicator since everyone shops there, and the fact that they disappointed earnings can’t mean anything good for the economy.

And while Wal-Mart’s problems may not be due solely to weak consumption, it’s doubtful the economy’s as strong as ivory tower economists believe it to be. Because from the looks of it, a few other retailers have dropped earnings bombs.

Shares of Restoration Hardware (NYSE: RH) took it on the nose when the company reported earnings, and of course Harry talked about how Nordstrom and other high-end retailers have been struggling of late.

The difference is that Wal-Mart caters to everyone, while Restoration Hardware and these others are high-end retailers. But, if all consumers are feeling the pinch, we could be in real trouble because consumption is nearly two-thirds of GDP!

There are also dramatic shifts in society that stand to threaten retailers and consumption in the future. All of them show we may be mired in a muddle-through economy.

Consider some of these shifts…

We hear every day that the gap between the Average American and the 1% is widening. Median real household incomes are down double-digits this century.

That doesn’t bode well for consumption. While lower energy prices help put money in people’s pockets, skyrocketing health care and educational costs suck it right back out.

In addition, according to the Distressed Communities Index (DCI), over 50.4 million Americans live in a distressed neighborhood. Of those, 25% don’t have a high school diploma, and the unemployment rate is as high as 55%.

So while the “recovery” benefited wealthier parts of the country, these distressed communities lost jobs and more than 8% of businesses closed. Clearly, the wealth gap is widening as inequality grows.

Then there’s the credit squeeze.

Credit was much easier to come by before 2008. I remember when I bought my home in 2002, I was given a home equity loan equal to 15% of the purchase price. So, I only had to put 5% down.

I couldn’t understand how I could get a home equity loan even though I had no equity! It was just a stroke of a pen. Fortunately, I was able to pay off that loan in six months. Most people aren’t that lucky.

Those days of easy credit are long gone. Even back in 2009 when I needed a new car, I couldn’t for the life of me get a loan offer. It wasn’t like I was broke or didn’t have a job. I had plenty of cash to cover the cost of a car and was gainfully employed. Finally, I was able to obtain financing but it wasn’t easy.

As it shows, we are now in a period of tighter credit for the consumer. And, while real estate has rebounded, people cannot use their homes like they did in the old days as an ATM to finance consumption.

Next up, those darn millennials!

I don’t know if younger people are ruining it for everyone, but as a group they cherish experiences more than “stuff,” and it creates a bit of an economic dilemma.

According to a Harris study, 78% of millennials would rather spend money on an experience than physical goods. That’s all fine and good, except ownership is a really important facet of consumer spending!

This demographic is in the sweet spot that retailers love, however their behavior is different from prior generations. Probably because after seeing house prices plummet and 401(k)s turn into 201(k)s, they don’t want to turn out like their parents.

Lastly, the Sharing Economy.

Yesterday I had to be at the airport at 5 a.m. I turned on my phone and called up a ride from Uber with the punch of a couple of buttons. Just a few years ago, it would have been mind-boggling to essentially hitch a ride from a complete stranger at 4:30 in the morning, yet there I was.

On top of that, my Uber cost to the airport was approximately a third of the price it would’ve cost me to call a cab!

As a whole, the Sharing Economy has changed consumer behavior, driven down costs, and completely squashed companies that fall within the status quo.

So retailers may have to hunker down for the foreseeable future. A weak consumer and shifting behavior don’t bode well for their financial performance for some time to come.

John Del Vecchio
Editor, Forensic Investor 

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John Del Vecchio
In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.