Retail closings could hurt interest rates

The Christmas wrapping paper had barely been cleared up and the lights were still on the tree when Sears dashed the holiday spirit with some somber news that is was closing 120 Sears and Kmart locations.

While there will always be winners and losers in retail, at such a sensitive time for the economy, the troubles of an organization as large as Sears have broader implications than just the decline of one company.

A sour note

Throughout the holiday shopping season, retailers had been singing a joyful tune of strong sales activity. The National Retail Federation even upped its growth forecast for the season to 3.8 percent. Then, just two days after Christmas, Sears announced the closing of the stores.

While this introduced a sour note, it may well be that the weakness is particular to Sears. Already this year, they had been losing business while competitors reported sales growth. In addition, the Kmart acquisition has looked like a costly mistake for years now, saddling Sears with redundant locations and another set of financial problems.

Still, until the final results of the 2011 holiday shopping season are in -- specifically, the corporate earnings reports and GDP estimates that will come out during January and February -- there will remain a nagging question of what the Sears announcement says about retail sales in general.

3 reasons to worry

Clearly, the announcement from Sears is bad news for employees of the affected stores and for shareholders in the company. However, here are three reasons why the closing of 120 Sears and Kmart locations is worrisome for the economy in general:

1. It could be an early warning sign about holiday sales. Early indications were that holiday sales were strong, but people tend to be quick to report good news, and slow to report bad news. Are the Sears and Kmart closings indications that there may be some disappointments in the final retail sales figures for 2011?
2. It creates a stiff headwind for the job market. Employment growth has been trying, rather unsteadily, to develop some momentum in recent months. The layoffs from 120 major retail stores will be a real challenge to that momentum.
3. It may signal continued weakness for banking business. Weakness at Sears and Kmart could be an indicator of trouble in both the consumer and business sectors of the economy, two markets that banks need to revive in order to get their loan business healthy again. If consumers want to see higher savings account interest rates at some point in 2012, they need to root for bank lending to pick up first.

The overall impression seems to be that the weakness of Sears and Kmart stores is primarily due to factors particular to those chains, rather than being typical of the retail sector as a whole. However, the fact remains that those chains are large enough for their problems to be a drag on the broader economy.