RAPAPORT... The National Retail Federation is predicting a 4.8 percent growth rate for 2007 retail sales, a slow growth that should mean a soft landing for the economy but not a recession.
The first half of the year will show slow economic growth, but that rate should accelerate for the second half, according to the National Retail Federation’s (NRF) quarterly Retail Sales Outlook, which was released at the NRF’s 96th Annual Convention & Expo held in January in New York City.
The NRF is forecasting real Gross Domestic Product (GDP) growth of 2.2 percent for the first half of the year, improving to 2.6 percent in the second half. Average real GDP is expected to increase 2.3 percent, compared to 3.4 percent last year. Improved employment in the second half of the year will contribute to this uptick.
The current slowing is a trend that began last year, which saw marked deceleration in the second half. The economy had a strong start in 2006, with 5.6 percent real GDP growth in the first quarter. But that slowed in the second and third quarters to 2.6 percent and 2 percent, respectively, below the economy’s presumed potential of 3 percent. Results for the final quarter were not yet in when the NRF made its 2007 projections, but they are expected to also show subpar growth of around 2 percent.
The good news is that the deceleration in the third-quarter real GDP was mainly due to a big drop in residential housing, an acceleration of imports — which detracts from the GDP — less investment in business inventories and in state and local government spending.
STILL SPENDINGConsumer spending continued to grow, although at a somewhat slower rate. “The most important sector of the economy — consumer spending — is still the strongest, even though it has lost some steam because it has been impacted by weak housing,” said Rosalind Wells, the NRF’s chief economist. According to Wells, high-energy costs and subdued consumer confidence are making consumers more cautious and this is showing up in retail sales in particular.
In 2006, real consumer spending grew 3.2 percent. This year, according to Wells, it will increase a more moderate 2.8 percent.
Wells said that the Federal Reserve (the Fed) has left short-term interest rates unchanged at 5.25 percent. This, she said, shows the Fed’s recognition that the economy is slowing and inflationary pressures have lessened.
Wells said that luxury retailers will continue to outperform other retailers, online shopping will continue to escalate and lower- to midlevel retailers will find achieving sales gains more challenging.
Electronics will continue to sell well, thanks to strong demand generated by excitement about new products and attractive prices.
Wells said that the rate of growth in online shopping is decelerating somewhat, but she doesn’t expect it to tail off to any substantial degree. She expects online shopping to continue to show double-digit growth, although it may be in the lower double digits — 11 or 12 percent, instead of 16 percent.
MIXED SIGNALS
Economic signals are mixed, and it is a close call as to whether the current slowdown will lead to a soft landing that eventually will lead to a reacceleration of growth or deteriorate into a recession. The near-term direction of the economy is hard to assess at this point in the business cycle, according to the forecast. But the NRF is interpreting signals optimistically. The forecast seems encouraged by positive indicators for consumer spending and investment in commercial construction. Some indicators are weak, including housing, autos and manufacturing, while others are “moving sideways,” according to the forecast, which referred specifically to employment figures.
Employment growth has been lackluster — and this is important, because income is one of the major drivers behind consumer spending. During 2006, a little more than 1.8 million jobs were added to payrolls, an average of 153,000 per month. In the previous year, total employment grew by almost 2 million, an average of 165,000 per month. Growth in both years was concentrated in the services sector.
Retail jobs declined by 58,000 last year. Since labor costs represent a large portion of overhead costs for retailers, they try to maximize productivity with as lean a staff as possible during periods of slowing sales growth, according to the NRF.
Inflation is moving in the right direction. The overall Consumer Price Index (CPI) in November was 2 percent above the previous year, considerably below the 4 percent at the start of the year. The core rate, which excludes food and energy, was 2.6 percent higher. While that’s above the 2 percent the Fed would like to see, it is still down from the high of 2.9 percent seen in September.
HOLIDAY SEASON WAS STRONGThe economy is going into the year from a strong, although nowhere near record-breaking, holiday season. Wells said that the NRF had forecast a 5 percent industry sales increase for 2006, which was less than the previous year’s increase of 6.1 percent, but still an above-average sales increase. She said this more modest projection was due to factors such as the general economic slowing, the end of the housing boom, high energy prices and modest employment and income gains.
The actual holiday results were down from the forecast, at 4.4 percent, which is exactly what the five-year average for holiday sales comes to. The ten-year average yearly gain was 4.6 percent, according to Wells.
She said that the 2006 holiday season started with retailers doing aggressive promotions designed to lure shoppers into stores. In many instances, that worked well, but, as in seasons past, subsequent weeks saw a letdown in sales. Shopper procrastination was one reason for that letdown. Then, the end of the season saw the usual last-minute rush to buy, which fell short for many retailers, Wells said.
Unseasonably warm weather also had an impact. It mostly affected winter apparel, though not as badly as many had expected, Wells said.
Consumer electronics were in high demand — big-screen, high-definition televisions. iPods, digital cameras, laptops and video games. Also in demand were apparel and accessories and jewelry sales were strong, too, Wells said.
Wells also noted that some holiday spending continued to move into January, as shoppers use gift cards, which are becoming increasingly popular, or decide to wait for January sales to make their purchases.
Article from the Rapaport Magazine - February 2007. To subscribe click here.