Retail could be hurt by shrinking 'invisible economy' for years

Start with a U.S. recession. Add constrained credit conditions. Mix in an aging population. Then subtract five to ten million customers. Stir.

What do you have? Not only declining consumer spending and retail sales, but a structurally altered retail landscape -- perhaps permanently.

That's one of the 'new realities' that the nation is likely to face as it inches its way back toward economic growth, says economist Peter Dawson. And the primary reason is a major reduction in the 'invisible economy' -- undocumented workers who spent money in the U.S. who have returned to Mexico and other home countries, due the recession and the lack of work in the U.S.

A segment of U.S. consumers . . . leaves

Further, although the number of undocumented workers in the U.S. prior to the recession was poorly defined, with estimates ranging from 7 to 20 million depending on the source and the methodology used (according to The Christian Science Monitor), Dawson said the more relevant point for investors is the fact that a large portion of these workers have left the U.S. -- perhaps as many as 40-50% -- and they've taken their consumer dollars with them.

"The number who've left could be as much as 4-7 million workers or even higher. No one really knows because we've never really had an accurate survey of how many undocumented workers lived in the U.S. during the economic expansion," Dawson said. "The invisible economy has been one of the great unknowns in U.S. economics."

But one thing is certain, Dawson says: assuming 4-7 million workers left, that's a significant amount of commerce and a major reduction in retail sales. The California and Florida economies would be the hardest hit, Dawson says, followed by New York, then Texas, with the Lone Star State seeing fewer undocumented workers leave, due to the oil patch's comparatively better economic status during the current recession.

For investors, the trend means you shouldn't assume a quick snap-back in consumer spending and retail sales, particularly at retail chains, including drug stores, bargain basement and mid-level clothing chains, convenience stores, fast food and casual dining chains, and auto parts chains, among others. "We'll get a better read on retail sales trends as the U.S. economy bottoms, then begins to expand, but every indicator right now points to a slow, long recovery period for retail sales and an altered retail environment," he added.

Economic Analysis: More evidence of the structural changes likely to affect the U.S. economy in the decade ahead. Retail sales will not only be hurt be a consumer pullback and by the aging population, but by the absence of previous consumers, in this case millions of undocumented worker consumers who've left the country. And that suggests a decidedly smaller retail sales pie.
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