Friday, August 04, 2006

Retail employment a bellwether of recessions?

I never thought I'd find things like monthly employment reports interesting, but it's undoubtedly important. Calculated Risk notes that two areas impacted the past several months have been residential construction employment and retail employment. An earlier post at Calculated Risk discusses the relationship between these two numbers: the housing market is weakening, and retailers are concerned enough by this to brace for a downturn by cutting back on hiring.

From the same Dallas Morning News article that Calculated Risk quotes:

During the housing boom, home-equity withdrawals were a big contributor to consumers' ability to spend. But in the first half of 2006, nearly 90 percent of refinancings were cash-outs, up from 20 percent in 2003. In other words, it used to be that people refinanced their homes to lower their payments. Today almost all go through the exercise just to unlock cash.
It stands to reason that retailers would be the first to detect the diminution of this source of disposable income, which is at least partially to blame for the 86,000 jobs the sector has shed in the last three months.
The diminution of this disposable income is due to the weakening housing market. The first domino in a chain may make a soft landing as many have suggested the housing market will, but the ripple effect can be immense. The withdrawal in retail hiring portends volatile times ahead.
Goldman Sachs chief economist Jan Hatzius wrote, "the year-on-year growth rate has plummeted from 1.3 percent in 2005 to -0.2 percent as of June 2006. Year-on-year declines in retail employment are unprecedented outside of recessions."
My position in equities is now well under 20%, and I'll drop it further if the market tests another careless rally.

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