December 15, 2004
Wal-Mart Nation Stands Unprepared To Battle Recession

It has been alleged that Wal-Mart uses strong-arm tactics to ensure that its underpaid and benefit deprived employees never unionize (except, perhaps, in China). It has also been alleged that Wal-Mart’s cut throat business policies are forcing U.S .jobs overseas and creating a ‘Wal-Mart Nation’ that caters to the demands of one company. The theory that results from these allegations is that there are long-term costs from ‘always lower prices’: American workers - faced with declining wages/benefits [because of Wal-Mart] - can only afford to shop at Wal-Mart...

Allegations aside, to those who have profited from owning WMT talk of bad corporate policies is heresy.  As for those who have watched the company’s stock price soar from the sidelines, they can only talk about opportunities lost.

“We bought a little [of WMT] and it moved up a little and I thought maybe it will come back a bit. That thumbsucking has cost us in the current area of $10 billion.”   Warren Buffett’s response at Berkshire Hathaways’ annual meeting last May when asked by a shareholder what his worst recent mistake was.

Besides being a solid long-term investment, Wal-Mart has also become an increasingly important component of the U.S. economy. Indeed, the near term performance of the largest corporate employer in America (second only to the U.S. federal government), is a key economic indicator.

What is the Wal-Mart indicator telling us right now? That the U.S. economy is weakening and threatening to get weaker.

Economic Recessions Come and Go, But Wal-Mart’s Sales Have Never Declined

Not only was the 2000/01 economic recession one of the shortest on record – estimated by NBER as lasting only 8 months – but it was also the first recession that saw the U.S. consumer come out of recession in worse financial shape than when they went in (See “Personal Savings [as a percentage of disposable income]” and “Household Debt Service and Financial Obligations Ratios”) Like the U.S. consumer, Wal-Mart rarely catches a cold.  In fact, since going public in 1970 Wal-Mart has never reported an annual decline in revenues, earnings, or shareholders’ equity.  Very few companies have ever achieved such consistent growth for so long.
 
Recent History of ‘Wal-Mart’ The Economic Indicator

Wal-Mart’s same store sales comparisons mirrored the post-Iraq recovery.  Moreover, a dip in Wal-Mart’s monthly sales provided one of the first indications that a ‘soft patch’ had emerged in mid-2004.


The latest Wal-Mart estimate is that comparable sales will be up 1%-3% in December.  Given how poorly Wal-Mart performed on Black Friday, these numbers mean that the company believes sales will rebound before Christmas. A poor November and a rocky start to December puts these expectations into doubt.

Regardless, what is becoming increasingly clear is that Wal-Mart is a leading, not a lagging economic indicator.  Years ago Greenspan counted corrugated boxes and scrap steel production to gain insights into future economic trends. Greenspan probably tunes into Wal-Mart’s weekly sales announcement to gain a better understanding of economic activity today.


Playing By Wal-Mart’s Rules

The trend of low wages, benefit deprived employees, and high employee turnover rates is not one that has been brought about by choice, but by necessity.  If Wal-Mart vendors want to maintain tremendous increases in sales they must continually cut costs. If Winn-Dixie, The Great Atlantic & Pacific Tea Company, and countless others want to remain going concerns they must cut costs. If the U.S. consumer wants to buy something at the lowest possible price they must shop at Wal-Mart.

Insider Tidbit

I have been informed that Wal-Mart middle managers were told last Friday that they would not be receiving bonuses this year (although if certain sales targets are reached a percentage of bonus may still be attainable).  If no bonuses are paid this would be the first time in decade that middle management has been passed by. Wal-Mart and the media has not confirmed or denied these reports.

Putting The Pieces Together

Because the U.S. is deeply reliant on foreign capital to fund its deficits, a consumer led recession (where the consumer borrows less and saves more for a period of time) would seem to be just what the doctor ordered.  Unfortunately U.S. policy makers will not stand idly by and watch the consumer save money.  Rather, Greenspan and company have adopted stimulatory policies that treat economic slow downs as the plague, and asset bubbles - in stock prices and home prices - as the cure.

When the largest retailer in the world catches a cold the long anticipated consumer led recession will not be far off.  Judging by the last four months of choppy same store sales reports and Wal-Mart management is being handed a lump of coal (or worse) before Christmas, there is, at minimum, a cool breeze in the air. 

Why is it that ‘Wal-Mart Nation’ stands unprepared for recession?  Because the thriftiness of the average American consumer sits in stark contrast to the reckless investment habits of the average American investor. In other words, since that which has helped fuel the spending boom in America is grounded upon weak moorings, when recession arrives the fallout threatens to be that much more severe. 

In short, Wal-Mart’s weekly sales figures not only a leading indicator of economic growth in America, they are also an indicator of the upcoming demise of the U.S. housing and financial markets. Thanks to a ‘Wal-Mart Nation’ under Greenspan there is no Henry Ford type figure to illuminate a simple question: how will consumers keep spend if wages are not increasing?