Peak Malls? Retail Floor Space Overbuild Meets Tectonic Structural Shifts, Part 1

Social and economic megatrends typically take a generation or longer to take shape, fully develop, reach their peaks, change course and eventually be overtaken by another trend. When a trend reaches a turning point and starts to reverse direction, it typically does so in such a gradual manner that people living through it do not notice the trend change until long after the fact. And only then can we with 20/20 hindsight recognize a time period when it changed directions and point to one or more pivotal moments or precipitating events demarcating said course change.

Generational peak consumer spending as measured by retail sales growth is probably not be one of them, however.

Although the final chapters on the trend of consumer spending are yet to be written, it would be fairly safe to declare a peak in consumer spending, at least for this generation, and point to the 2008 financial crisis as the defining moment when the wave of consumer spending crested and started to reverse course.

Countless mainstream economists, financial analysts and central bankers would have you believe that what we witnessed during the 2008 subprime mortgage crisis was a one-off event and the subsequent recession as a cyclic occurrence soon to be replaced by another sunny-day-again economic upswing, thanks to the billons in credit from economic stimulus programs, Quantitative Easing  (printing money out of thin air) and Zero Interest Rate Policy sprinkled by the governments and central banks all over the world.

However, there is strong evidence which indicates that the latest economic downturn is anything but cyclical. The growth in consumer spending had been predicated upon several fundamental factors which had been decades in the making. These economic factors include:

  • Personal income growth
  • Buildup in personal debt
  • Population growth and demographics (baby boomers, Gen X and Y priorities and preferences over time)

Other emerging factors which will increasingly assert themselves include:

  • The rise of e-commerce and its impact on brick and mortar retail stores
  • Impact of rising energy costs on personal mobility and disposable income

Whereas economies of developed countries have benefited from the tailwinds of these structural factors in the past decades, the shifting of these same factors is now turning themselves into significant headwinds. Going forward, only population growth, inflation and stunted economic growth will contribute positively towards retail sales growth.

Coupled with the massive buildup of retail floor space in recent years thanks to insanely low interest financing and decision makers of retailers who extrapolate the prior consumer spending trend into infinity, we are now about to witness a major storm where peak generational spending meets massively overbuilt retail space, i.e. peak malls.

In Part 1 of this series we shall examine the fundamental factors of personal income and consumer debt. Other fundamental factors and how they will collide with peak malls will be discussed in future articles.



There are three essential drivers of consumer spending: personal income, personal credit/debt and population growth/demographics

Stagnant income growth

Adjusted for inflation, real median income in the U.S. has fallen to levels last seen in 1988.

Despite what distorted official statistics indicate, the full negative economic impact of the 2008 financial crisis has yet to be removed. Labor participation rate is still way down and shadow unemployment figures still show the economy in a severely depressed state. Worse yet, the median household income adjusted for inflation is at the level last seen in 1988, as illustrated by the chart below courtesy of

Real median US household income



US labor participation rate

In essence, there has been no organic income growth after inflation to sustain a higher level of consumer spending. Any increase in consumer spending since before the financial crisis was driven almost entirely by personal debt buildup and to a much lesser extent population growth, as we shall discover later in this article.

Until meaningful employment, and, more importantly, good paying jobs return, the average household is not going to get additional cash to spend.

Consumer debt

The personal debt credit cycle which fueled much of the consumer spending binge during the years leading to the subprime crisis has all but evaporated.

Consumer debt, the other fuel for consumer spending, has been on the increase since falling off a cliff in 2008 (not that incessant growth in personal debt is a healthy sign, but that’s beyond the scope of our discussion at hand). However, growth in different types of consumer debt has been uneven in the past five years.

The chart below is the total outstanding consumer debt since 2009. Total debt outstanding grew in the order of $170 billion each in 2012 and 2013.

Total outstanding consumer debtSource: Federal Reserve

Let’s break down the total credit/debt into two categories:

  • Non-revolving debt – key components of non-revolving debt include home mortgages, auto loans and student loans.
  • Revolving debt – mainly credit card debt.

Considering the fact that consumer spending, especially retail spending, is significantly driven by credit card (revolving) debt, let’s look at this category in more detail.

The first chart below shows the total outstanding credit card debt from 2009 to 2013. The second chart below shows the YoY percentage change in said debt during the same period. The third chart shows the YoY actual amounts changed.

The first observation that can be made from these charts is that there was major shrinkage in the total outstanding credit card debt between 2009 and 2010.

Remember those headlines saying the consumers were “deleveraging” by cutting back on spending and paying down their credit card debt? Sadly, that wasn’t quite true. Cutting back, yes, but paying down debt? No. The reason for the sharp drops in 2009 and 2010 was the result of credit card companies writing off delinquent debt on their books.

Total outstanding revolving consumer debtSource: Federal Reserve

Consumer credit - percentage changesSource: Federal Reserve

Change in outstanding credit card debtSource: Federal Reserve

As the economy stabilized and recovered somewhat, consumers started spending again, as witnessed by the small but positive increase in credit card use. In 2013, for example, credit card debt grew by $10.9 billion. That’s a 1.3% growth over the previous year.

Oh, by the way, where did all the growth in credit go, you wonder?

This is where it all went:

Change in student and car loansSource: Zero Hedge

Out of the total of $166 billion new credit added in the 12 months ending Feb, 2014, a whopping 98%, or $162 billion, had gone into non-revolving debt in the form of student loans (total over $1 trillion and counting and soon to be defaulted upon and bailed out by the tax payers) and auto loans (subprime loans with LTV <100% coming back fast and furious). Student loans, another credit bubble in danger of bursting, is a topic in and of itself and deserves to be covered in a separate article.

So how much is $10.9 billion (or $4.1 billion in the 12 months ending Feb, 2014) in credit card spending growth in 2013 within the context of retail spending by consumers?

For comparison, let’s take a look at those happy years of home equity loans and cash out refinancing cumulating in the subprime mortgage crisis in 2008. From 2003 to 2008, a total of $2.3 trillion – that is $2,300 billion – was extracted, i.e. borrowed by consumers against their homes. Assume that the amounts used on home improvement and personal consumption count towards retail spending (19% and 20%, respectively, see chart below), that amounts to close to $900 billion over three years or $150 billion per year of purchasing power.

Credit from home equity financing pre-2008
Source: Zero Hedge

So home re’fi alone was adding $160 billion a year of credit fuel to the economy. Add to that the ‘wealth effect’ of constantly appreciating home and stock prices, one can imagine the crack up boom in consumer spending fueled by the subprime housing bubble.

As you can see, $4 billion of credit growth pales into insignificance when compared with the many prior drivers of credit growth – and there are many of them—which fueled the boom in consumer spending. With the bursting of the one-in-a-generation housing bubble and ensuing unemployment and under-employment brought on by the recession and no new drivers of credit growth over the foreseeable horizon, it is inconceivable that credit growth would contribute in any significant way to the rebound in retail spending any time soon, likely in this generation.

To be continued…

References and suggested readings



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