I haven't exactly been optimistic about the economy's chances of a near-term recovery, but a few things I've read today have made me think things are even more grim than I'd previously thought.
How long can you tread water?
Despite the latest round of direct-to-citizens stimulus (via Social Security), retail sales numbers aren't picking up. One possible explanation, offered by economist extraordinaire David Rosenberg, late of Merrill Lynch and now with Canadian money-management firm Gluskin Sheff: The extra spending money is being absorbed by higher gas prices.
As he noted on Tuesday morning, the average price of gas in the U.S. is now $2.36 a gallon, up $0.40 in the last two months and $0.70 since the start of the year, which he says is equivalent to a $90 billion annualized drain out of consumers' discretionary cash flow. While I'm sure the folks receiving that money are grateful for the help, I suspect that's not what the architects of the stimulus had in mind. And if you've been looking for retail sales numbers at high-end stores like Saks (NYSE: SKS ) and Nordstrom (NYSE: JWN ) to start gaining momentum and head for a recovery later this year, you may be disappointed.
Got spending?
The rate of job losses may be slowing somewhat, but their second-order effects will continue to spread into the economy for some time. By that I mean: When folks lose their jobs, they go out to dinner less often, they don't buy new cars or video game consoles or high-end kitchen gadgets, and all of those businesses suffer further declines in turn. Eventually some of those places go out of business, creating more layoffs, along with vacant space that puts downward pressure on commercial real estate prices, and on and on the chain goes.
It's important to think about these kinds of chains when evaluating economic news. Here's another one to think about: General Motors (NYSE: GM ) and Chrysler will be closing thousands of underperforming dealerships. On the one hand, this is good: Both have had too many dealers for years. Part of the reason that American-brand car dealers have such a lousy reputation is that per-store sales have been barely enough to keep the lights on in many cases, leading to mad pressure on salesfolk to extract every possible nickel and dime from everyone who walks in the door. And that, in turn, leads to that slimy feeling you got from the salesman when you tried to check out that Dodge Charger last year.
So closing dealerships is, on balance, a good thing from the point of view of GM investors, consumers, and so forth. Except … car dealers buy an awful lot of local advertising. Fewer dealers means less ad spending means more pressure on newspapers and broadcast media means more layoffs at those companies means … you get the idea. It's not just one set of losses; it's a hit to the larger economy.
Got lending?
Rosenberg also notes that bank reserves have risen sharply -- and as he points out, that's not hoarding, because credit guidelines have been loosened over the last few months. Instead, it’s because people aren't taking loans. Even folks who aren't dealing with a job loss are apparently still feeling very defensive, financially speaking -- sales of everything from houses to cars to desktop computers are still way below levels we would have considered "normal" 12 to 18 months ago.
Money just isn't moving around very much. That's one reason why, despite all of the Fed's lavishness, inflation isn't a big worry at the moment -- put very simply, if people aren't spending, prices tend to head down, not up. Oil prices may be rising, but weak markets for housing, used cars, and other common purchases could keep overall inflation low -- possibly even in negative territory -- for some time.
What to do
Long story short, I think we're not out of the economic woods yet, and staying defensive for a while longer might be a prudent move. Rosenberg has been talking a lot about corporate bonds, but I think dividend-paying stocks can offer similar benefits with somewhat more upside -- if you select companies that are likely to be able to maintain (or even raise) their dividends.
Consumer staples companies like Campbell Soup (NYSE: CPB ) or Procter & Gamble (NYSE: PG ) , both of which have dividend yields well over 3%, or utility-ish stocks with even higher yields like National Grid (NYSE: NGG ) and Waste Management (NYSE: WMI ) , are all worth a look right now.
The key is the ability to sustain the dividend payments even if our economic troubles continue. The market has seen some big gains recently, but if it heads back down, a 4% or 5% dividend yield could start to look awfully good. And given the weakness and uncertainty that's still out there, another trip to the market lows is far from out of the question.
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