The worst plunge since the Financial Crisis
OK, this is anecdotal evidence supplied graciously by the Dallas Fed, via the comments in its Texas Service Sector Outlook Survey. It’s how a business in “Professional, Scientific and Technical Services” sees the Texas economy. There are other businesses that are doing well, and some of the comments confirm that. Not everyone is getting slammed. But….
We were up 7.5% for the year through March. April alone put us down 2% year to date. That is what is going on out here in the real world … dang little! We are a 56-year-old family-owned company that averages 17% growth per year.
This economy is in and headed deeper into the tank faster than all the talking heads can spin their silly data and metrics to portray the story most beneficial to whatever lines their pockets best today. That said, Texas and our commodity-driven markets may set us apart as some sort of dark anomaly.
The stories are now piling up of oil-bust contagion working its way deeper into the overall economy of oil-producing states, including Texas. Unlike some other oil producing states, Texas has a vast and diversified economy. So from the beginning, it was said that this time, the oil bust won’t hurt like it did last time; the pain would be contained in its isolated corner of the economy. But this theory is now falling apart. It comes on top of the weakness of the overall US economy.
And consumers are reacting.
Sales tax collections in May, for sales in April, plunged 7.1% year over year, according to the Texas Comptroller of Public Accounts. It was the worst year-over-year decline since March 2010 at the very bottom of the last retail crash during the Financial Crisis and the oil bust that ended in a V-shaped recovery as the Fed’s bailouts, QE, and ZIRP started taking effect.
The $2.4 billion in sales taxes collected in May was also lower than two years ago, a first since the depth of the Financial Crisis.
In March and April, collections had risen 2.1% and 3.1% respectively, a brief respite, after having declined every month since October. Despite that respite, for the first five months this year, sales tax collections are down 2.8%.
Over the past 12 months, collections have dropped 8 times on a year-over-year basis. Total collections for the 12-month period are down 1.8%.
This chart by “David in Texas,” who obtained the data from Texas Transparency, shows how the 5-year retail boom, as depicted by sales tax collections, is hitting the skids. I circled the months with year-over-year declines:
Retail in Texas thrived after the Financial-Crisis, and sales tax collections soared nearly 50% from the first half of 2010 to the first half of 2015! That was one heck of a party!
But then it got tripped up: in June and August last year, sales tax collections declined year-over-year for the first time since March 2010.
Sales tax collections don’t capture every retail sale. Many food products like flour, sugar, bread, or vegetables are exempt. Taxes on motor vehicle sales and rentals are reported separately. The data is not seasonally adjusted. So it can only be compared year-over-year. Unlike other retail data, it’s not based on estimates, surveys, or economists’ opinions, but on real dollars that real consumers actually spent during that month. It’s a raw and unvarnished glimpse of reality.
And yes, Amazon charges sales taxes on items shipped to Texas, including on shipping and handling fees. So the decline in sales tax collections is not due to a sudden shift by consumers to online retailers.
Not every place in Texas is feeling the pain. Some people might wonder what all the fuss is about in Houston and elsewhere. Home-flipping is still the rage in Dallas. There’s anecdotal evidence that Chinese investors seeking refuge in US real estate have finally discovered Dallas. The startup scene in Austin might still seem exuberant, albeit with the same ripples now showing up in Silicon Valley and San Francisco: a select few startups are attracting a lot of money, and many others are left twisting in the wind. Every city has its own economy. But overall, consumers are realizing that this is no longer a blip, but a new reality, and they’re adjusting their spending.
Houston has special problems: “See-through buildings” – that’s how the empty shells of office towers were called during the oil bust of the 1980s that took down 9 of the 10 largest banks in Texas – are once again getting dumped on the market. Read… This is how the Houston Office Market is Melting Down
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The question on everybody’s mind is how deep and how wide will this go and has the recession that we have all been anticipating really started? I think it has and actually started months ago but that determination won’t be made until after we will have been deep into it..
Obfuscation and helicopter money of one king or another will keep this going, but it cannot hide the reality that the basic construct created by Greenspan more than twenty years ago is fundamentally rotten.
John Law tried the ultimate in helicopter money in 18 century France – it collapsed- one cause of the French Revolution.
Most recently Zimbabwe, before it Zaire.
Nothing knew- works until it doesn’t.
One thing that sticks out – why would someone settle for .08 % on the German 10 year bund ( bond) when they can get I think about 1.7 % on the US 10 year?
That’s a heck of a difference in a yield obsessed world.
I don’t know in what currency the bund is in- I guess euros.
Isn’t there as much risk to the euro as the US$?
Anyone know ?
The U.S. government has a long history of defaults whereas the German government is considered more trustworthy. When the dust finally settles the investment community (mostly European as Americans don’t save) believe Germany will stand up and make good on its obligations.
The Euro is going to collapse before the dollar. Once the herd of European investors lose confidence in the EU government and the US FED has raised their interest rates. Then the European money will exit Europe and chase yield in the US. Invest in a German 10yr bund at .08% or invest in a US dividend producing company with a 3% dividend yield. As an added bonus the USD will appreciate against the Euro. Hmmm, what to do?
John Law created what later became known as a Ponzi scheme.
Kurt Vonnegut wrote in his book that Charles Ponzi’s greatest strength was his utter stupidity: he actually believed that he had a legitimate business, and his scheme would work. Now, that meme reminds me of someone in our time.
For the immediate term, stick to the USD.
I have lived in Europe off and on for 10 years exchanging EUO/USD. The euro has been declining.
Just remember, the fiat money experiment has only been around for 40 years. With all the money printing, how long before people begin to question “what is this money”?
“has the recession that we have all been anticipating really started”
mine started in Q3 2014….I’ve had spurts of work since but that quarter was peak earnings.
So did my personal recession, which is actually sort of a depression. Came from upper middle class, college education, no bad habits, many marketable skills…..there’s very little money out there. But I’m not buying into politics solving anything anymore since I am finally reading “Tragedy & Hope” by Carroll Quigley. No system can solve this set of problems. We each must learn to find our own way through this and take personal responsibility. I was ashamed of having three jobs, now I see it as diversity that will save me. I spent personal money to improve my health with good diet & lifestyle choices, now I am not declining at 64. Even the alt media is making this out to be a disaster when the systemic failure will probably bring many good changes.
WHY THIS ALL NONSENSE….I know for a fact our President said every thing is just great. It is …right? I mean we can Trust what comes from the leader of the USA since he is in the know, his finger where the pulse is on the health of his watch.
Just because the 3 retailers that we HAD in Texas went out of business means little. Just because the 22 other retailers we had in the rest of the USA went out of business mean nothing because we are TOLD everything is peachy.
I am sure that all these customers just want a reduced price on the goods. IF… if I could just get them to answer the phones, I know they want to order more wonderful things to sell to the customers whose noses are pressed against their store windows.
I think we might need to let go three more employees this week.
Awesome post.
http://www.horchow.com, a Neiman-Marcus affiliate, has been having a whole lot of sales this year (2016). I wonder if they’re having trouble moving product at regular prices.
And PE-owned Neiman-Marcus itself is in a heap of trouble. They’ll report earnings in a few days. Should be fun.
Friends in high-end retail in Texas tell me the economy sucks and their business has fallen off a cliff. When over-priced luxury goods stop selling, you know something bad is coming down the pike. My friends are all worried about the rising prospect of layoffs in the near future.
I don’t think the downturn is just limited to high end; the whole retail industry got so addicted to Made-In-China cheap goods from TVs to screwdrivers along with the Internet that they unknowingly nurtured an entire generation of bargain hunters and misers. In simpler terms their business model has become self-destructive.
As a former fashionista I can tell you that the problem in the luxury market is quality, it is not there any more. Everything is ten times the price and now made in China or somewhere in Asia. I still browse the high end merchandise and wouldn’t buy most of it even if I had the money. The easiest place to see this is in the accessories: shoes, handbags, sunglasses, etc. Not much difference between the $10K handbag and the $200 handbag, or the $2K shoes and the $200 shoes, in terms of quality. I currently use a designer bag purchased over ten years ago and nothing made today, from the same designer, matches the quality.
No handbag is worth 10K
No shoe is worth 2K
That’s exactly the problem. Polo/RL is in WSJ today, talking about their turnaround because they’re having problems too. Note to their CEO – I used to love buying Polo/RL – have lots of it still, won’t buy anything else though, since it’s all made in China and poor quality.
This whole “outsource to the lowest cost” model is like eating your seed corn.
Here’s the thing, anybody will compromise on quality if the price is low enough. Guess which way the increasingly impoverished 99%er swings the balance to?
Besides, quality can be overrated…A $10 screwdriver may be significantly better than a $1 for professional purposes…But the problem of the $10 version is the vast majority of people doesn’t need or want the $10 one to begin with.
Jonathan,
Your post tells me you know nothing about the luxury market. It is about quality, design, and exclusivity. They will pay more to keep themselves and the stuff away from the riff raff. They stay away when the quality or design is inferior, or when everybody else can afford it too.
Does anybody really think a cup of coffee is worth $6. It isn’t, the atmosphere it is sold in is the real product.
All but one county in Wyoming had retail sales taxes down 20% in the last fiscal year. Taxing food and internet is on the table.
I live in Idaho food is taxed at 6%.
They won’t find enough tax $ to solve their problems. We all should stop eating packaged foods & beverages. Stick it to the corporations who stuck it to us. Go back to drinking water, eating home-made food.
Already do. For years.
That alone is reason to start that victory garden and get some egg hens laying asap Cathy oh and you know its organic as well
Made my first Wyoming trip from WA State in 2012.. Really nice clean prosperous towns and I’m sorry to hear of your troubles.. Very dependent on extractive industries so with coal and oil on the skids it was probably inevitable but I’m still sorry hear it.. 20% down on sales tax is really getting hammered!
The financial Viagra is wearing off.
It’s just Texas. Chairman Janet says things are so good that she’s going to take away the punch bowl (sometime) but for now Party On! Animal spirits are unleashed.
It’s not just Texas. There are meaningful signs of slowdown in low and high end businesses across the US. An example on the high end is seven restaurants closing between 11/2015 and 2/2016 on one street in the high end NYC neighborhood of Tribeca:
http://ny.eater.com/2015/1/5/7495603/greenwich-street-seems-doomed-as-seven-restaurants-close-in-only-a
http://tribecacitizen.com/2015/02/23/another-restaurant-has-closed/
I will read both of these stories later, But as for NYC “The Rent is Too Dam High” this is what hurts these restaurants….. Closet size place, seats 30 elbows interlocked – is that my fork yer waving around of yours…?
Too many trendy places in a small spot, how much can you eat ? Someone has to go….. But then NYC, San Fransisco, Texas might just be the canaries….
Does the sales tax include sales to businesses? If so, does it include major equipment/machinery (excluding vehicles)? If business in Texas are struggling that would mean less purchases on office supplies, furniture, etc. in addition to the impact on the lack of sales to oil drillers
I know from experience that B2B sales tax can add up quickly for companies and would like to know if it is the same for states.
Generally speaking, sales to businesses are subject to sales tax unless the purchaser is buying the goods for resale to its own customers. I’ll have to look up your question about major equipment and machinery. Offhand, I don’t know the answer to that.
Movado ,the luxury watch maker, has a market cap of little more than its working capital;AMZN has a market cap of almost 125 its working capital.
The stock market loves AMZN and hates MOV
Smart watches are the in thing these days with the millennials. They can answer their phones and read their text messages. Movado and the other watch makers are in a lot of trouble because the smart watch business is a subset of the computer (commodity) business. Prices will only go down and they are by design disposable.
Have to agree with Petunia on the quality issue. Brands I used to trust implicitly now get more scrutiny. I’ve become a tag reader, something I never used to bother with. Even Carhartt is trying to slip ringers in with cheap Chinese shirts. I guess if I were buying to put on the dog it might be ok, but I need performance and comfort out of the clothes, so go figure. I quit buying anything Levi since I heard a woman in their marketing department sneer at a question about quality, then pour salt in the wound by declaring well, you know, we’re not targeting the truck driver demographic any more. And as a sole representative of said demographic I am not buying Levis any more, since I’m not the least concerned about how my butt looks. When I find quality I spend, otherwise I’m not.
Most everything is Made in China since most everybody wants “low” prices.
We are the enemy.
Why does every town in the US look the same with the same fast food places? Same Walgreens/CVS, same shops in the same looking malls.
Because WE shop there and, thus, We are the enemy.
Don’t blame the others, look at yourself. Take a good hard look before you say “you’re different”.
EH: The situation you describe is the continuation of something that has been going on for a long time. In the early 70s I worked in a hardware store while an undergraduate. Well known quality electrical appliances like Sunbeam had already begun to decline. Conglomerates were buying smaller companies and reducing the quality of their products to increase profits for the shareholders.
We were the enemy as you say. We were a fairly strong union area at the time, with two major unionized manufacturers in town. It became a joke that a tire plant worker, being paid union wages, would pull up in a Volkswagon and buy a couple of rolls of Belgian barbed wire. And of course complain that the prices were too high. Now those folks wonder why their grandkids can’t find the kinds of jobs they had enjoyed. Not the sole cause of union decline, but the union members surely undercut themselves.
I love this observation. I lived in Atlanta for a while, and everything is a chain, every few streets look exactly alike, same stores every 10 miles….. I had always wondered why all the traffic?
A really good point! The destruction of the diversity of American culture scares me. Why should such a vast country look the same everywhere?
Thats what you get when you allow corporations to take over your country İ always go to the small family run restaurant and NEVER go to the fast food joints Better food and keeps small enterprise alive to fight another day İf more people would do the same the big chains would wither on the vine and they wouldnt be missed by me anyway
um, energy down, blood tired, hard to get that go out and buy animal spirits going.
is called recession in the patch. if you don’t know it’s coming, it’ll be here soon enough.
it’s just arithmetic.
I don’t believe that anyone has emphasized the role of the massive flooding in Texas during May and early June. I would think that the other than buying water pumps, sandbags, boats and life preservers, there wasn’t a great deal of interest in much else in many areas of the state.
We’ll get that data next month. Sales tax collections in May (when the government receives the money from companies) were sales in April.
So the weather disruptions should show up in June collections, which are for May sales.
Not sure about Amazon having to pay sales taxes in Texas. From the below 2012 article regarding South Carolina:
“Amazon opened the Lexington County facility after winning an agreement last year from the state legislature that it would not have to collect sales tax in South Carolina for five years, despite having a physical presence in the state. Amazon said it will spend $50 million on the new warehouse, which will employ hundreds of full-time workers.”
https://www.internetretailer.com/2012/01/23/amazon-will-build-fulfillment-center-south-carolina
The Amazons website says they currently collect sales taxes in South Carolina:
https://www.amazon.com/gp/help/customer/display.html?nodeId=468512
Seems like we have a contradiction here.
2012????? There has been a sea change since.
A lot of states, including the biggest states such as California, have cracked down on Amazon over the past couple of years. In CA it was a Battle Royale – with Walmart on one side, Amazon on the other, the legislature torn in two over it – and lots of extortion all around.
But now that it’s a done deal, the biblical catastrophes prophesied have not come true.
Does this mean Amazon tossed their 5 year exception from paying sales tax in South Carolina?
I don’t know about South Carolina. I think the Amazon page that lists SC as a state where it collects sales taxes would be accurate, or at least has a better chance of being accurate than info from 2012.
Here it is again:
https://www.amazon.com/gp/help/customer/display.html?nodeId=468512
The best way to test it is to buy something from Amazon with a shipping address in SC. The final price should tell you whether or not sales taxes are included. You can then cancel the order. Then report the results back to the rest of us. I’d love to hear the results.