Retail Sales Report and TARP Unveiled This Week

For a little over a year the U.S. economy has been spiraling out of control, mostly due to the mortgage crisis that began at the end of 2007.  This economic crisis was mainly caused by financial institutions (surplus units) being forced to lend to households and businesses (deficit units) so that these deficit units could take out mortgages.  Due to a vast amount of deficit units defaulting on their loans to these financial institutions, lenders tightened their grip on credit standards for borrowers as well as how much they were willing to loan out.  Once this tightening occurred the market became illiquid, meaning that no longer was it profitable for companies to buy and sell assets on an open market.  The lack of liquidity in financial markets forced the Bush administration to take action in order to curb losses incurred by lenders from widespread mortgage defaults.  The result was the Troubled Assets Relief Program (TARP), a piece of the Emergency Economic Stabilization Act.

TARP was designated to take $700 billion and purchase financial institutions’ troubled assets.  This was done on the hopes that after receiving a surplus of capital, financial institutions would resume normal lending practices.  However, after receiving the initial infusion of cash to buy up the troubled assets, financial institutions, such as commercial banks, did not resume normal lending.  In fact, it seems they became more frugal and in effect the market saw no sign of improvement.  Throughout the first quarter of 2009 the economy is still showing strong signs indicating a recession and once again the U.S. government is stepping in to apply relief to financial institutions by buying up their troubled assets.  According to the article, “Retail Sales, TARP Take the Stage“, this upcoming week will be a big financial week when the Retail Sales report is released as well as a new bill for TARP possibly being passed.

Retail Sales Report

The Retail Sales report, which is a monthly report containing sales data from multiple retailers, will be released this week.  The report unveils sales data across the retail industry, showing what the demand was for products and services in the previous month; basically it tells us “whether retailers will have to restock their shelves”.  Investors and economists look at this data as “an indicator of future demand and thus production”.  From this Retail Sales report, economists will be able to better gauge what the GDP (Gross Domestic Product) will be like in the upcoming months.  If sales were down (most likely), then it is fairly clear that there is not a great demand for products; hence the GDP forecast looks bleak.  If sales were up (highly unlikely), then there is a clear demand for products and services to be produced; this would indicate that the U.S. GDP is looking better.

Due to the unemployment rate, which is another economic indicator, it is clear that businesses do not see a fruitful forecast in the upcoming months.  Last month, the unemployment rate was 7.6%, which shows that retailers and their suppliers are not seeing the demand for products. To ensure profitability is maintained, employers are forced to reduce expenses through payroll reduction and hiring freezes.  Nevertheless, the Retail Sales report will undoubtedly show that sales are down, that consumers are not buying, that there is no need to produce in order to meet demand, and GDP is on the downward trend.

TARP

Last October, Troubled Assets Relief Program (TARP) was created by the Federal Government to help purchase up to $700 billion of toxic assets from a multitude of financial institutions that were facing bankruptcy.  This was done to shore up the financial market and to ensure that surplus units would resume normal lending.  However, this was not the case as financial institutions held on to their new capital to meet the required reserve ratio (percentage of deposits that commercial banks must maintain as required reserves), which is dictated by the Federal Reserve, or simply to ensure their profitability as a business.  After a quarterly survey of Senior Loan Officers, the Federal Reserve “found continued tightening of lending standards and a growing reluctance of businesses to even apply for loans”.  Due to the effectiveness of TARP, President Obama has made it his personal mission to revive this program and infuse more cash into the program with better regulation.

This week a new bill worth approximately $800 billion dollars will be voted on by Congress.  Once again, the goal of this stimulus package is clear:  Prevent the economy from worsening.  TARP would buy up more troubled assets (securities) on the Open Market and thusly would dump billions of dollars back into these suffering financial institutions.  Upon receiving this financial bailout, these financial institutions would increase their lending, at an ideally lower interest rate, to businesses and homeowners.  Thus, the banks are profitable, businesses are making money, and spending increases all across the board.  However, people are now frightened to spend, let alone request loans.  As stated in the article, “a greater percentage of lenders reported weaker demand for loans, with borrowers, in effect self-policing: not applying if they fear rejection or not applying because they have postponed capital spending plans”.  While the efforts of the administration are admirable, especially with considerable thought being placed on regulation of these funds, it seems as though once again billions of dollars will simply build up in the reserves of these financial giants.