By John F. Di Leo -
Should we be worried if the stock market doesn’t seem to be?
We get the oddest mixed signals from the economy sometimes, don’t we?
In recent months, we have learned of 95 Ruby Tuesday restaurants that will be shutting their doors… and that Macy’s will be closing a hundred department stores… and that 255 Hancock Fabric stores will be closing… and that Sports Authority will close virtually all 450 of its locations… the list goes on and on.
Every week, there’s another such announcement, and yet the Dow Jones Industrial Average keeps setting record highs. And so, some of us are perplexed.
They shouldn’t be perplexed. Too many of us have been raised to believe that the DJIA represents the economy – that if it’s up, things are good, and if it’s down, things are bad. Nothing could be further from the truth.
Such a generality is akin to judging American public health by how well orange juice is selling. Is orange juice an important ingredient in a healthy diet? It certainly can be… but it’s a mere fragment of one’s diet; you can still be fat or thin, healthy or sickly, regardless of what role orange juice plays in your daily food consumption. Your health is a very big picture issue, and orange juice is just a very small part of that picture.
The natural tendency for an optimist is to make an excuse for the closures, every time a store closes… which really means trying to make an excuse for the economy, trying to blame the company rather than admit to it being the fault of outside influences. (Odd, isn’t it, that this would be our natural default?)
We see the news about Ruby Tuesday, and we say “Well, their menu is really fattening, so people have been understandably avoiding it…” or “Well, they’re awfully old-fashioned; they never updated since the 1980s…” And as we all know, the restaurant business is hard, so we’re not surprised when a restaurant closes.
We see the news about Macy’s, and we say “Well, they’re expensive, and it’s a rough economy…” or “Well, they’re in every mall, even in areas that are losing population, so maybe they overbuilt.” And there’s always the new/old standby: knowingly nodding and saying “it’s all the online competition nowadays, you know.”
Excuses like this can be made for every business. Hancock Fabrics? People don’t make their own clothes as much anymore. Office Max and Office Depot? Well, there was a merger, so naturally there was duplication. Sports Authority? Well, you can buy a lot of that stuff cheaper at Walmart. Applebee’s? Oh, they’ve had trouble for years, so more trouble is no surprise.
We make these excuses, but we must know, deep inside, that they ring hollow, for a number of reasons.
When chains build or acquire new locations, they do studies first to see if there is, or should be, a market for their product there. The individual entrepreneur might start a business somewhere because that’s where he lives, for good or ill; the chain first seeks out sites that objectively look good, at least on paper. So a lot of the excuses we make for individual business closures don’t really apply to chains. Outside of the mergers of multiple nearby sites owned by operated by the merging owners – like Office Depot / Office Max – almost every location is one that should, according to the rules, have succeeded.
In addition, most of our excuses would apply to stand-alone small businesses, but the advantages of chain membership nullify them. Sure, a small store has difficulty competing with online merchants; sure, a single restaurant can’t advertise every Sunday like a big chain… but those big chains HAVE these advantages; the economies of scale in operating hundreds of stores should make up for most of the intrinsic challenges that the small business faces.
And by the way… it’s not like the chains are collapsing but the small businesses are thriving. Quite the opposite; small shops and restaurants are challenged today as well, their closures just don’t make national news. They are ALL suffering.
Every time you hear a news report that a chain is closing a hundred locations, assume that it’s just a drop in the bucket. There are plenty of individual closures that cumulatively dwarf even these terrifying numbers; they just don’t make the national news.
Should We Care, if the Market Doesn’t?
This is one of the greatest of false premises. In fact, the market DOES care, but the market is measuring something different than we might think.
The stock market doesn’t measure the economy. We get the idea that it does, because of names like the Dow Jones Industrial Average, but that’s not what it does at all.
The stock market first measures the valuation of each individual business, in a vacuum: did this company perform to expectations, did it fail to do so, or did it succeed beyond expectation?
And then, only by looking at many – at dozens or hundreds in the same index – do they estimate if the majority of that index are doing as expected, or better, or worse.
But there are so many subjective points built into this process, aren’t there? What about all the other businesses in the area? It doesn’t address them. Maybe these companies have succeeded only because they’ve wiped out the rest of the businesses that AREN’T part of the index. Or maybe they have succeeded because they have diversified abroad, and now have more and more productive foreign locations… which is good for their bottom line, and therefore for their stockholders… but the more such foreign activity there is, the less that business’ stock performance really means to us, in terms of being representative of the US economy.
So it really isn’t that the market doesn’t care about all these closures, it’s just that such closures may mean a good thing to the business that owns them (because they’re getting leaner, cutting their losses and their expenses), but it’s still representative of a bad thing to the economy at large.
The stock value of the companies in question may well be correct – even the upward trajectory of the companies in the index may be truthfully represented – but the mistake is ours in trying to take a stock market index, that actually only tries to represent the value of the specific big businesses listed, and then imagine that it tells us anything about the broader economy in general.
In fact, the American stock market is less and less an indicator of the health of the American economy every year. There’s nothing wrong with that fact; the only wrong involved is if we foolishly misunderstand it and mistake the market’s performance for a snapshot of the economy as a whole.
Always remember, the vast majority of companies, jobs, and dollars spent in the private sector are not in the publicly-traded behemoths of the NYSE. Your local restaurant, your local manufacturing plant, your local grocery store probably doesn’t have an overseas empire of foreign plants and foreign customers to bring in sales volume and cost savings to make up for losses at home.
The stock market is part of the economy, but it is not THE economy.
Why Do Closures Matter?
Now, this part should be obvious, but it must be covered, partially because it’s a key to understanding why the stock market is sometimes even a counter-indicator to the economy as a whole.
What do we care about, in discussing the economy? We care about whether people are employed or not, whether people are paying taxes or on the receiving end of entitlements. We care about whether the general standard of living is rising or falling. We care about whether people are advancing in desirable careers or stagnating in entry level jobs because there’s nothing else out there for even good employees to climb up to.
When a chain closes a hundred locations – or, for that matter, when a hundred unrelated places close – that may sometimes be good for the corporate owner, but what is the effect on the communities those places had served?
- All those sites stop paying rent, or stop paying mortgages, or stop paying property taxes.
- All those sites stop employing the five or ten or twenty or fifty employees they had employed previously.
- All those sites stop paying the utilities – gas, water, electric, waste removal – that they had been paying weekly or monthly until then.
- All those sites stop buying local services like landscaping and snow removal and laundering and carpet cleaning and pavement sealing.
- All the employees who have now lost their jobs stop paying taxes until they get a new job… and all the sales that the business used to make immediately stop producing sales taxes to the municipality, township, county and state.
- To the extent that those sites had acted as anchors to strip malls or shopping centers, they no longer bring that traffic to their neighboring stores like they used to, so their loss becomes their neighbors’ loss as well.
- Since chains like this provide many of the first jobs for young people just starting out – busboy, waiter, cashier, floor sales – these opportunities to get the first job, or the first taste of a career in foodservice or retail – disappear, leaving the area’s young people with fewer ways to get a start.
- And it’s not just the “first jobs” that disappear, either. There are relatively few jobs for the store accountant, the store manager, the restaurant manager or head chef. When that store or restaurant closes, these full time career jobs disappear as well – destroying not only the tax base, but more importantly, all too often, these individual human lives.
So, does it matter? Oh yes. The stockbrokers are right to cheer when the stock they hold cuts loose its underperforming locations, but nobody else should cheer. It’s bad news all around.
The Growth Population and a Growth Economy
America is growing. Granted, it’s chiefly by immigration, but still... It’s growing.
Because past growth spurts in the 1800s and again in the 1900s tended to mean more workers and consumers to grow the economy, the conventional wisdom has predicted that the same would occur in recent decades.
What’s another million employed people? That’s another million consumers! Hurray!
But conventional wisdom is no longer right on this point.
Let’s look at the last fifty years. We’ve gone from 196 million people in the summer of 1966 to 322 million today. If economic growth had been proportional, we’d have no problem at all keeping our stores, restaurants and factories busy, with 126 million more people to patronize them.
But this recent explosion in population hasn’t meant the same thing it used to at all. At the same time that we have been importing an immigration pool that is generally sicker, less educated, less experienced, and all-around harder to integrate than past immigrant populations, we have also been raising taxes, increasing regulations, and growing the welfare state. As a result, the proportion of entrepreneurial immigrants and sons of immigrants is less dependable than in the past for spurring growth… and the upward mobility of immigrants is almost gone… and in general, the cost of immigrants as a net burden on society is greater than ever before.
As one must say at this point, these are generalities, and do not mean to imply that no immigrants open businesses of their own, or that no immigrants assimilate, or that no immigrants pay their way. Obviously many do. But the numbers on these matters are not what they once were… partly because of where they come from, and partly because of what they are arriving into: no longer an expanding nation enjoying unprecedented boom times, but rather, a struggling nation in perpetual recession, bleeding factories, bleeding employment, bleeding opportunities.
Chains build new locations because they read the tea leaves, and the tea leaves say “there WILL be economic growth here in a few years.” So they buy the land, build the building, purchase the inventory, and hire the staff, and they’re ready to make money on this growing population when the recession ends.
Imagine their surprise when the recession doesn’t end as predicted. After two years, four years, six years, eight years… We are now ten years from the start of the recession that hit as soon as Nancy Pelosi and Harry Reid took over Congress in 2006. Ten years out, and it’s still not over. Oh, it plateaued eventually; after a two year freefall, just in time for the first two years of the Obama administration, when, every time anyone tried to get up, the city of Washington DC put on the old brass knuckles and beat them down again. Cash-for-clunkers, the trillion-dollar porkulus, obamacare, the anti-coal crusade…
Businesses – especially big businesses, run by graduates of nonpolitical business schools with nonpolitical MBAs and nonpolitical little minds – too often make their decisions based on statistics and dreams rather than recognition of the real world. “The economy will come back soon, because it must.” “The recession will end in 16 months, because they always do.” “We’ll sell millions to these new arrivals and these career-climbing professionals, because they’re bound to be there; they have always been there.”
And then they are shocked when their expectations turn out to have been built on a house of cards.
Get used to the mass closures of our chains. Get used to empty restaurants, empty storefronts, empty malls. Get used to an economy in which kids can’t work their first job at Macy’s or Applebee’s or JC Penney’s like their dads and moms did, thirty years before. Because those chains won’t be there.
Or when they are, they can’t employ the local teenagers anymore, because they feel they’re fulfilling their social obligation by employing the town’s adults in those jobs; better than being out of work entirely, right?
Is there a solution? Of course there is. The Paul Ryan economic plan, the repeal of Obamacare, the Trump/Pence tax proposals, the Republican promise to pull back the last decade of destructive overregulations across the board… these are the necessary paths to repairing the American economy.
Democrats have changed all the models. They have ensured that population growth makes things worse, even though historically in America, population growth made things better. The Democrats have created a tax and regulation labyrinth that crushes economic opportunity and drives employers away. Goodbye, textiles. Goodbye, steel. Goodbye, automakers. Goodbye, small appliances. All thanks to Democrat policies.
With nobody left to employ people, can we wonder that the only disposable income comes in the form of an EBT card with the logo of Link, WIC or SNAP on it?
If we want to put an end to the empty storefronts and empty resumes that pepper our landscape, we must put an end to the gullibility that has led us to accept the empty promises of the American Left for so many years.
Republicans aren’t perfect, but Republicans don’t drive manufacturing offshore at the speed of sound.
Republicans don’t terrify entrepreneurs out of starting new businesses.
Republicans don’t eliminate jobs by scaring companies out of hiring people.
We must learn, once and for all, NOW, not later:
Never vote for a Democrat, for any office. Not for president, not for state or federal legislature, not for judge. Not even for school board, park board, or city council.
All they do is destroy… from coast to coast, from border to border, and yes, from mall to mall.
Copyright 2016 John F. Di Leo
John F. Di Leo is a Chicagoland-based international transportation and trade compliance professional. His columns are found in Illinois Review.
Permission is hereby granted to forward freely, provided it is uncut and the IR URL and byline are included.