Penney CEO Calls for Consumer Stimulus Package
Like
many others in retail, J.C. Penney CEO Mike Ullman has
seen his chain struggle as the economic situation in the U.S. has deteriorated
over the course of the year. Last week, Mr. Ullman told
analysts he believed it should be "job one" for the Obama administration "to
get the consumer back in the game" and spending again.
According
to a Financial Times report, Mr. Ullman said that a lack of consumer
confidence was the most serious threat facing the U.S. economy and needed
to be addressed swiftly.
"We
know that the Federal Reserve has been very, very active in reacting to…financial
pressures, and there’s been less focus on the consumer up until the last
90 days," he said.
"It
[consumer spending] is 70 percent of the
economy. People with money are not spending as freely as they otherwise
would, because they are concerned about the lack of visibility to ’09 and
beyond."
The Financial
Times correctly pointed out that the National Retail Federation has
been calling for a second stimulus package to spur consumer spending.
Discussion Questions:
Do you agree that a lack of consumer confidence is the most serious threat
facing the U.S. economy? Is a stimulus package focused on consumer spending
the right approach to deal with the confidence issue and get the economy
moving in the right direction again?
The call for a consumer stimulus package is appropriate from within the limited perspective of what’s potentially good for JCP in the short term. All of the real high-potential options available for governmental influence on consumer spending involve much longer lead times and slower impact rates than Mr. Ullman would like to experience. I don’t blame him for this.
And, I agree with all other comments about the probably impact of a consumer stimulus, assuming past tactics are employed. I’m sure that Mr. Ullman has access to greater economic insight and advisors than I do…so I’m also sure that there are economists who will argue that some form of cash infusion to the consumer will be enormously beneficial. The data I have seen does not support this. I am of the belief that consumer CONFIDENCE is no longer the key issue…outside of higher income segments. Rather, I believe that real disposable income has evaporated, driven primarily by the elimination of debt expansion which had been funding it.
I’m sorry. I agree with others. The government will not have a silver bullet to bail out the retail sector and kick start consumer spending. Retailers are going to have to adjust, adjust FAST to the new reality, and reconstruct themselves to survive.
Ron Margulis is so “spot on” accurate in his assessment of what is needed…I want him on Obama’s team, now! For once, we need to invest in long-term solutions instead of short-term fixes.
What supported consumer spending over the last ten years or more? It was the run up in home values. With huge increases in the value of people’s homes, homeowners would refinance a larger mortgage, take the cash and either spend it or pay down their debts from previous spending. How much of the consumer spending boom was financed from Home Equity loans that had credit cards attached to them?
Now the total value of debt against homes is greater than the cumulative value of that real estate securing those loans. Not only is there nowhere to go for new spending, the consumer has a burden of paying down and cutting their existing debt. A stimulus package similar to the last will generate no more consumer spending any than the last one did.
Before the government sends out more stimulus checks, the government must look at keeping the economic situation from getting worse. They must extend unemployment benefits to a sustainable level and time. The default of unemployed workers without some type of support will only feed the current crisis. The other thing that must be done is the initiation of the Obama tax plan to cut the taxes of the people who can use the money on an everyday basis. Further, I would double up on the cuts for those making $75,000 or less per year.
The cracks in the economy aren’t from the top. The cracks are in the foundation.
At this relatively early stage I do believe that consumer confidence is still the determining factor, however, real job losses will soon overtake confidence as the primary issue.
A stimulus package targeted to drive consumer spending won’t work any better than last summer’s checks, as long as consumers themselves have a bunker mentality. This is going to continue as long as job losses continue to pile up and (more importantly) as long as the housing crisis continues unresolved. It would be more productive to target the same funds toward the kind of mortgage relief that the head of the FDIC has proposed. This would be the first step toward a broader sense of financial well-being, although not a panacea as far as credit-card debt is concerned.
Let’s face it…the Treasury department has not managed its TARP assets with the kind of consistency or consumer-driven mentality that is needed to drive confidence.
While I do believe that consumer confidence is important, another stimulus package is not the answer at this time. When the country comes out of the current economic meltdown, encouraging spending needs to be balanced with the need for sensible savings.
A combination of consumer over-reaching and corporate greed got us into this mess, forming the perfect storm that took the economy down. The country needs to find equilibrium through a balanced approach to spending and regulation, not more helter skelter consumer spending.
Right now, if you give the consumer a stimulus package either one of two things is going to happen. One, they will stick it in the bank because they will still not have the confidence that $1,000 is going to save the economy. The last one did not. Those who need to spend the check will most likely spend it on something other than what the consumer goods people like Penney’s would like to see it spent. It is going to go for things like food and medicine.
When are we going to make the tough decisions and do the things that count to get the country back on the right track? That is a long-term solution like putting incentives on creating jobs and helping American business compete in today’s world market.
Let’s use the money to create some investment tax credits for business to spend on growing their business, which will create jobs. This will not be a short-term stimulus but a long-term stimulus and an investment.
Consumers are suffering a very serious crisis of confidence. They’ve virtually stopped spending due to unending anxiety about their own finances and the nation’s economy. That said, I hesitate to say this lack of confidence is the most serious threat facing the US economy. No doubt, it’s a threat. But it’s also one of the leading results of the dire economic situation that is circling the globe. I’m doubtful another round of government checks will do much to restore the confidence needed to reinvigorate the economy. This is a deeper problem than a few hundred dollars can cure.
Along with energy independence, let’s also rebuild our infrastructure and build out, for the first time, our communications infrastructure – i.e., broadband. The last time I saw numbers, the US was 15th in the world in speed and access to broadband internet. And to my way of thinking, it’s hard to claim leadership in science and technology if our overall internet access is mediocre at best and entire swaths of the country can’t even participate because they’re still on dial-up.
Now, I’ve seen statistics that say that we actually contribute more to global warming with our coal-fired power plants than our addiction to gasoline, which would make our efforts to live more online than in the car seem counterproductive, the broad-based energy program that Ron and all of our friends here are discussing could easily find replacements for coal.
Another thing that’s got to happen is that business needs to be about serving customers before shareholders. For the last couple of years, it’s been clear that some retailers had no interest in merchandise and customer service at all–it was all about the real estate.
In October, my landline phone and DSL went out on a Sunday. On Monday, I got told the phone company didn’t have a technician they could send out before Wednesday. There was no mass outage; this was routine wear and tear on the line outside our house. So, presumably, someone had made a decision to hold staffing to a level that would keep net earnings at a level that would add some number to some vice president’s bonus–no matter that such a level didn’t meet customer needs. Earnings were more important.
Now look at sorts of statements I keep reading about the causes of the mortgage crisis: “Companies had so much cash to invest that they needed more high-return places to invest it–they had put as much into the stock market as they could, and needed ways to diversify. With the returns they were seeing on collateralized debt obligations, it was only natural that the demand for those instruments would spike.”
And, at the other end of the market: “Mortgage companies had so much money to lend that they started offering loans to new grads based on the incomes not that they had now–but that they’d have when they finally landed the jobs they were newly qualified for. When those jobs never materialized, the new homeowners defaulted.” Or: “It became the practice not to require any documentation from home buyers. That made it easy to make NINJA loans: no job, no income, no assets.”
Seems to me the folks couldn’t afford the loans because they didn’t have the jobs. The companies had the cash because they’d eliminated the jobs. The work still needed doing–that’s why a full-time job now often means 80 hours a week or more. And why I had to wait three days to get my landline back.
So–with energy independence, infrastructure, broadband and some sanity back in corporate America, I think we could add a lot to consumer solvency–not just consumer confidence.
I agree with most of what has been written so far, but one thing is missing–how to kick start the economy without boosting consumer spending. Reagan got us out of the last heavy recession by increasing military spending. That’s not going to work this time, but another buildup of government resources could. I’m thinking combining energy policy with economic policy to fund a massive program for alternative energy–wind, hydro-electric, thermo and even nuclear. This works program could be pervasive across industries, even helping Detroit move to making cars less reliant on gas and restructure to get contracts that align with the new policy.
The truth is, many consumers already have enough “things” to last them the next few years. The investment by the government should focus on the future, not the here and now.
Will another cheque from the Feds get people spending? Maybe. It’s much more than that. If JCP gets their wish, what are they going to do to get the customer back into the store spending that cheque? I advise my clients to not rely on the government and take action now to get people back through the door. We need to look at the stimulus cheque as gravy and have plans in place for right now.
Mailing checks to consumers will not restart spending. It did not the last time and it will not again. In fact, if another set of checks were mailed out it is likely 90% would go for debt reduction, not new spending. Our social experiment of home ownership for those who could not afford it set off the credit crunch. Until the supply and demand for homes gets into balance, home values will continue to decline. Since homes are the greatest asset for households, they simply will not begin spending until the decline stops.
Consumers feel poor today. Couple this with an incoming administration that promised change, but failed to explain what the change would be, which has resulted in consumers shutting down. At this point, it is unlikely the consumer will even venture out until next summer at the earliest.
While I have sympathy for the challenges faced by U.S. retailers, I’m in the camp that sees a short term consumer spending stimulus as a band-aid on a patient with heart disease.
This is a moment for real vision. Ron’s post above seems on the right track. A real energy independence “space program” seems like a key element to our future prosperity. While I’m not keen on nuclear energy due to its unknown long-term risks, I do believe that it makes sense for our government to establish strong incentives for development of carbon-neutral energy technologies. These could be just the shot of “juice” our economy needs.
Such a program might have the following features:
1) Government-backed financing of capital investments aimed at transforming carbon-offending businesses into carbon-neutral businesses. This could include funds for the auto industry, provided they are invested in R&D and re-tooling for transformative technologies.
2) Strong incentives for distributed power generation, including and especially solar rooftops, and wind. Retailers and other businesses with large flat-rooftops should be required to develop or lease out their real-estate for this purpose within five years. Homeowners would have 10 years to plug in.
3) To support the distributed power scenario, establishment of an “Energynet” power transmission network modeled after the Internet that would become the national superhighway system for electrical energy. In this scenario, major utilities would shift roles from energy generation to encompass energy storage and two-way transmission.
4) A government-led plan to encourage private industry to establish a network of hydrogen filling stations for motorcars that would eventually replace the present network of 450,000 gas stations. These new fueling stations should also incorporate rapid charging devices for plug-in electric vehicles. This is the only known carbon-neutral scenario.
Defining these programs would provide investors and industry with a clear future scenario. They would stimulate new forms of economic power within the U.S. and create exportable energy services and technologies that would be profitable for America. They would improve our geopolitical standing in the world and help temper the disproportionate power of oil-producing nations. They would help us reduce greenhouse gasses and preserve the global environment. The resultant confidence will surely stimulate consumer retail spending.
“It (consumer spending) is 70% of the economy.” This quote says it all, and this is what has got to change permanently through some pain. It doesn’t take an economics degree to see that this imbalance is in large part what brought us to our current financial instability. It was exactly the easy credit, the millions of maxed out and defaulting credit cards, and the home equity loans used to buy stuff that helped put Americans and the economy under water when prices of housing fell. This “money” was all so people could keep spending.
Is it too late to return to a balanced nation of producers and doers and savers rather than mere consumers? I hope not. More Government stimulus checks to “go out and shop” are not the answer right now.
Stimulating the consumer to “get back in the game” doesn’t work if the companies don’t offer things the consumers are willing to buy! Especially in a difficult economy, consumers have to really want an item before they purchase it. If you don’t offer what they want, no amount of encouragement is going to make them buy.
I think Liz Crawford makes a good point that consumer spending is more symptomatic of the problem than the cause. The economic realities are pretty tough right now, and the psychology is clearly not good. Credit is extremely tight, and it all goes back to the fact that right now we don’t really know what the real asset value of our housing stock is.
Until we stabilize real estate values–and that’s likely to include commercial and industrial real estate values–we aren’t going to be able to really get credit flowing again. And as much talk as there is about reducing overall consumer indebtedness, the consumer is really going to be hamstrung until credit eases.
Ultimately, we need to have a sustainable balance of spending and saving (i.e., reinvestment). With the help of years of extremely cheap debt (thanks, Fed) and the resultant poor underwriting standards, American consumers have been able spend way too much. The pattern was covered up by rising assets prices, without enough true wealth creation to support the prices.
The only answer is to stop consuming as much (as a percent of production), to have asset prices come back to appropriate values, and to produce more from the resulting growth in capital reinvestment. So why do people keep suggesting “solutions” (like borrowing or printing money to write stimulus checks, stopping asset price declines at irrationally high levels, etc.) that undermine this process?
Consumers have confidence when they have money to spend. Consumers have money to spend when their disposable income is predictable. Disposable income is predictable when employment is high, commodity markets are stable, wages are constant or increasing and the economy is growing.
Our consumption driven economy is out of balance and the process in which it levels is going to be both long and painful.
I see significant contraction and consolidation of the retail industry as both necessary and inevitable.
A “bailout” for the retail sector in the way of a tax stimulus isn’t going to work. I imagine if you’re a senior executive in a company like JC Penney, you must have to show your board that your doing something to impact your business…but it will help them little in the end.
I understand sales growth is the life blood of retailers…but for the sake of the economy, let alone this country, I cannot imagine how a CEO can come out today and argue for more consumer spending. We as a nation and individuals have been spending beyond our means for decades and now we need to deleverage. Retailers need to shift focus away from the top line and towards cost cutting to maintain profitability. There needs to be a huge paradigm shift and those who don’t adapt will fail (unless of course enough don’t adapt and thereby drag the rest of us down with them).
Consumer spending accounts for about 70% of GDP. It is a huge factor, obviously. However, it is probably more symptomatic than causal. There are many other issues driving the downward spiral. The job market, the credit market, the failure of so many corporations both retail and financial, not to mention wild swings in stock prices, the value of the dollar, gas prices. Who the heck can blame consumers for being a bit more prudent, whether out of necessity or anxiety?
I don’t believe there is a single silver bullet here. There must be a multi-pronged approach to pulling us out of the current crisis. Over simplification and finger pointing aren’t going to get us over it.
The problem is not confidence. It is credit. Countrywide yanked my home equity line of credit, saying the value of my property in Chicago has dropped too far. (Nonsense; unlike so many others, I had put 20% down, so there is plenty of equity in my home.) GE Capital yanked my ABT Appliance card with a similar excuse. I had been planning to remodel my kitchen, using a combination of low HELOC rates for the cabinets and an offer from ABT for interest-free payments over 12 months for the appliances. But now I not only have to delay my renovation plans, but also have to cut all discretionary spending in order to save up the cash for remodeling. That means no coffee from Starbucks, no candy from a vending machine, no lunch at my favorite Thai restaurant, no after work cocktails, no new shoes, no new clothes, no movies, no concerts, no iTunes, no magazines, no books, no must-have anything–nothing, nada, zip for at least the next year, if not longer. And a measly $300 or $600 or even $1000 stimulus isn’t going to change that. I need access to my HELOC restored. Nothing else will get me spending again.