25% of Retailers May File For Bankruptcy Following Poor Holiday Shopping Season

The economic death just keeps spreading. After hitting the financial industry, the housing industry and the car industry, the retail industry could very well collapse in the coming months. Following a dismal holiday shopping season and riding the coattails of highly publicized bankruptcies at Linen’s ‘N Things, Circuit City and KB Toys, as many as 25% of retailers may file for Chapter 11 protection in the first quarter of 2009.

In comparison, only 4-7% of retailers were expected to file for bankruptcy protection this time last year. Retail has long had the reputation of being one of the hardest businesses around, and the industry normally operates with many firms on the verge of bankruptcy. The current numbers, however, are unprecedented.

The Wall Street Journal reports that the first retailer to go under during the post-holiday season could be Goody’s Family Clothing, Inc., an apparel retailer in the Southeast with 287 stores. The company emerged from bankruptcy court in October, had a weaker than expected holiday season and may be seeking outside financing or loans. Goody’s is reportedly trying to avoid a potential liquidation by seeking outside help.

Goody's Family Clothing May Be Forced To File For Bankruptcy Protection
Goody's Family Clothing May Be Forced To File For Bankruptcy Protection

Many retailers that do not liquidate will likely trim inventory and cut suppliers, causing a ripple effect to other industries. Weaker manufacturers, small brands and cash-strapped fashion labels may fail even if the retailers themselves do not.

“We will have a lot fewer stores by the middle of 2009,” Nancy Koehn, professor of business administration at Harvard Business School, told the Wall Street Journal. “It’s happening very, very quickly because of the financial crisis and the recession.”

Prediction Markets Not Betting On A Depression

Though the US Economy has officially slipped into a recession, it remains uncertain whether the economy will worsen and transform into a full blown depression.

Though there is no universally agreed-upon definition, a depression is typically described as a sustained downturn in one or more economies that lasts for an extended period of time, often several years. It is more severe than a recession, which is seen as a normal downturn in the business cycle.

Depressions typically exhibit abnormal increases in unemployment, limited availability of credit, shrinking output and investment, a large and increasing number of bankruptcies, reduced amounts of trade and consumer spending,  and volatile currency fluctuations. Price deflation or hyperinflation are also common elements of a depression.

Myriad factors will play into whether or not this happens to the current US economy, but people are already taking bets. Though news programs may speculate that the current recession will actually become a depression, our economies future is actually far from certain. On the political prediction betting site Intrade, more people are betting that the Economy actually won’t slip into a depression (at least in 2009). The site calculates that, based on predictions, there is a 23.1% chance of a depression.

Prediction Markets Are Betting Against a 2009 Depression
Prediction Markets Are Betting Against a 2009 Depression

Intrade has been known for its extremely high accuracy in predicting political events. In the 2004 presidential elections, the Intrade market favorite won the electoral votes of every single state. In 2006, for the midterm elections, the Intrade market favorite won every since Senate seat up for election.

The accuracy of the betting markets comes from the idea that the wisdom and intuition of many is more able to predict an outcome than even the most knowledgeable experts. The people in the crowd that are betting give the best information possible to the market because their own financial reward depends on it.

So if we are to trust the prediction markets to tell us how the economic markets will turn up, hope is alive.

Companies Cutting Costs and Shedding Jobs

A government report issued Friday announced that the U.S. economy lost 533,000 jobs in November, bringing this year’s total to 1.9 million jobs lost. This was the worst monthly job loss since December 1974. Continue reading “Companies Cutting Costs and Shedding Jobs”