Wal-Mart, the New Fed

Prior to the U.S. recession of 2001 and 2002, economists speculated that economic changes would make the next downturn less severe than in the past.

Such reasoning was mostly based on alterations in the economy wrought by the high-tech sector. Just-in-time inventories at sophisticated manufacturers had transformed the entire nature of the business cycle, top economists claimed.

Well, it is true that the current recession has been amazingly mild. But the reason for this rather unlikely scenario may be found in an unlikely place — America’s most famous down-scale retailer.

In April 2002, Wal-Mart seized the top spot on the Fortune 500 from Exxon. But the company is best known for its ability to grab market share away from just about every other store in rural areas and small towns.

This is mainly because of its combination of low prices, excellent service and massive scale. And yet, as Wal-Mart became a retailing juggernaut that crushed its competition, it may also have saved the entire U.S. economy from an even worse recession.

How so? Simple. Wal-Mart has aggressively used information technology to reduce costs at its stores. Whenever a consumer makes a purchase at Wal-Mart, the retail chain immediately knows where and what needs to be replaced — and from where it should be purchased. Quite logically, that leads to lower inventory costs.

And, of course, Wal-Mart’s position in U.S. retailing means that other big retailers must adopt similar methods — or expect to suffer the fate of K-Mart and all of those local Mom ‘n’ Pop stores that didn’t take the Wal-Mart threat seriously.

In short, better technology is leading to a milder business cycle. But the magician is not the high-tech manufacturing sector as some have claimed. Rather it is good old-fashioned low-end retailing that is leading the charge.

Alan Greenspan, who is famous for his knowledge of obscure and not so obscure economic indicators, might do well to search in a new place for data. Is it time to connect the Fed directly to Wal-Mart’s computers?

After all, Mr. Greenspan is known for his desire to have plenty of data feeds in front of him. And Wal-Mart’s computers have the best software to keep track of 70% of the U.S. economy.

April 3, 2002