An alarming trend is developing that is moving in the wrong direction, and that is store closures. The biggest losers, from a humanistic perspective, are the employees who lose their jobs when stores close, but as an economist I want to have a look at what is causing this as well.

Most people, when asked “Why are so many stores closing, like Kmart, Payless, Sears, and Gymboree?” They’ll probably answer, “It’s the Amazon Effect.” What that means is they think that the only thing responsible for retail stores closing is internet sites like Amazon, Overstock, Wayfair, and others, are the reason, and nothing else really has any kind of impact except for Amazon type websites.

How about this as a reason…after over 100 years, Lord and Taylor recently closed its flagship store in Manhattan, and they cited the reason as the high expenses of keeping it open. They’ve seen many costs rising too rapidly in recent years, including their lease and wages.

Another cause is company executives making bad business decisions which lead to closing operations or bankruptcy, which typically leads to closing operations.  A good example is Toys r Us.  Their bad decision was outsourcing internet sales to Amazon.  So Amazon got to learn how to sell and ship toys at Toys r Us expense, quite literally. 

How about Blockbuster?  It’s pretty well known, especially if you listen to Gary Vee, that when Netflix started out, Blockbuster did a study that said people prefer to go to the store to rent movies because they like to open the video box and take out the tape. Really? Are you kidding me? And the second reason they didn’t see Netflix as a threat? The possible chance of being seen at the movie store by friends and neighbors. Company execs get a 10/10 on my whiskey-tango-foxtrot meter. Obviously Netflix won that battle because it seems that most people would rather lie in bed in their pajamas and take a minute or two to pick what they want to watch, rather than wasting 30-60 minutes going to the store and the possibility that the movie they want is not available to rent.

There are many reasons that retail stores are closing besides the Amazon effect. In fact in a recent study published by Coresight Research, the outlook for 2019 shows no light at the end of the tunnel. Already this year, US retailers have announced nearly 2200 store closings, up 23% over the same period last year, and the pace should continue to pick up speed. The report cited online growth, flat and declining retail sales over all (which mirror government numbers released after the shutdown ended), and one of the reasons I’ve cited numerous times: rising interest rates.

I’ve been saying that a rising rate environment would contribute to company balance sheets and cash flow being disrupted, and here we have proof of that. And this was not my own prognostication, it was hindsight in 20-20 from an outside source. The rising rate environment has impacted companies, so much so that bankruptcies in the first 6 weeks are already at 33% of the entire 2018 total, meaning the pace is to double this year compared to last. Most recently Charlotte Russe, a young women’s fashion store, has announced over 90 stores closing, and possibly the entire chain of 500 stores if they can’t find a buyer immediately.

As I’ve been saying for a while, rising rates are hurting the economy, and this Coresight report confirmed my expectations. It’s actually not a prediction that I am happy to be right about because 2200 store closings year to date probably means several hundred-thousand people are now unemployed or soon will be. Don't be blinded by the recent positive price action in the major indices. These store closings will bring additional downward pressure on the economy, and eventually Wall Street will recognize where the fundamentals are headed. To paraphrase Aerosmith, you won't be living it up while the markets are going on a fast elevator down.