Slowdown or Recession? Does it matter?
May 1, 2008 12:00 PM, David Bodamer Editor-in-Chief Retail Traffic Magazine
Seemingly since the fall there has been an ongoing debate waged on the question of whether the U.S. economy is merely in a slowdown or if it has entered a full-fledged recession. My question: Does it really matter?
There's a lot of confusion as to how to define a recession. By far the common view is that a recession is two or more consecutive quarters of declining GDP. That's not really how it works. In reality, the National Bureau of Economic Research (NBER) meets and weighs myriad factors and then officially makes the determination of whether or not the state of the economy classifies as a recession. There's no fixed formula. The economists look at employment numbers, manufacturing and service indices, GDP statistics and lots and lots of other data. And then they vote. This process takes place over a long period of time and the NBER won't make a determination until months after a recession has started (or, in the case of the 2001 recession, after the recession was already over).
I go through this lengthy economics exercise to make a point. In the here and now, the question of, “Is it or is it not a recession?” isn't going to be officially answered for quite a while. Regardless, owners, managers, developers, architects, brokers, retailers and everyone associated with the retail real estate industry needs to grapple with the actual economic conditions. And things are rough out there.
The consumer is getting hammered. Access to debt is limited. Housing prices continue to fall. Foreclosures are rising. Oil is trading at over $114 a barrel, meaning $4 gallons of gas aren't very far away. Employment rolls are shrinking. Wages are not rising. And inflation is becoming a real issue, with food prices rising at their fastest pace in decades. In perhaps the most dire development yet, a worldwide food crisis is taking shape affecting every corner of the globe. As we were going to press, news broke that retailers, including Costco, were beginning to ration food purchases on items such as flour, rice and cooking oil as demand has begun to outstrip supplies. There have been riots in Mexico, Italy, Haiti, Bangladesh and other regions. A whiff of panic is in the air.
The pressures on the consumer create massive challenges. Retailers — bruised by months of weak sales — are pulling back and closing stores, curbing expansion plans and going back to landlords on existing stores to demand rent reductions or other concessions. For the time being, owners and managers would be well advised to do whatever they can to keep retailers in place and operating. Even if less rent is coming in, that's better than no rent coming in at all.
Still, there are reasons for optimism. The industry did learn its lesson during the downturn of the late 1980s and early 1990s. New supply is continuing to come online and adding to pressures by raising overall vacancy rates. But developers did not overextend themselves too much. Moreover, the industry has been incredibly quick to react to the new situation. New starts are being delayed, downscaled or scrapped altogether. The pipeline is beginning to thin out. And that will be a saving grace if this current economic malaise lasts a while.
In all, it makes for an incredibly interesting setup for this year's ICSC RECon. If you have insights you'd like share with us, swing by our booth: S6030 in the Trade Expo. We'd love to hear your thoughts.
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