Economists don’t see relief for retail until the second half of the year
BY PHILLIP M. PERRY
Precarious curves before heading into a straightaway.
That’s the economic forecast as retailers enter a new year. Hazardous conditions will remain at least for the first half of 2013 as consumers hold tight to their pocketbooks and commercial activity is constrained.
Economic roads will improve in summer and fall, though, as the resolution of critical uncertainties encourage corporate hiring, capital investment and consumer spending.
The coming year as a whole is not expected to bring significant relief over 2012.
“We expect the recovery to remain lackluster,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa.
The numbers tell the tale. The most common measure of the nation’s economic health is growth in gross domestic product, the annual total of all goods and services produced in the United States. Moody’s expects GDP to increase by 2.4% in 2013. That’s not much of an improvement over the 2.3% anticipated for 2012 when figures are finally tallied.
Moody’s forecast might not seem all that bad, given that the GDP increase for an economy in average growth mode is 2.5%. But there’s a problem: A nation recovering from a recession needs more robust expansion.
“By most measures, this recovery is among the weakest in the past 50 years,” Koropeckyj says.
What’s holding things back?
Koropeckyj points to a number of areas.
“Fiscal restraint on the local and national level, weaker global demand, a housing market that has hit bottom but has a long way to go to become healthy and weak income growth are all restricting a stronger pickup in employment,” she says. Other factors include the weakening economies of China and Europe—both important markets for U.S. exports.
All of these are coming together to subdue the public mood.
“Consumer confidence is still at a level consistent with a recession,” says Scott Hoyt, senior director of consumer economics for Moody’s. “Consumers remain concerned about economic conditions. There is still high unemployment, weak growth in wages, volatile stocks and high gasoline prices. There are a lot of things to keep consumers on edge.”
Rocky retail environment
Retailers will suffer as concerned consumers hold onto their purse strings.
“We expect the retail environment to be difficult in 2013, growing at some 2.3%,” Hoyt says. That pace represents a de-escalation from the 3.2% anticipated when 2012 figures finally are tallied. (To put those figures in context, average annual core retail sales grew at 4.6% prior to the 2008 financial crisis. Core retail sales exclude volatile revenues from auto sales and gas stations.)
Moody’s expects pressure on retailers early in the year because of the major weight of a constraining federal fiscal policy. While consumer confidence spiked upward a little in early fall, consumers will continue to be affected by the anticipated terminations of two initiatives: the Social Security payroll tax holiday and extended unemployment insurance benefits. Reduced federal spending, by eliminating some jobs, also will have an indirect but significant effect on consumers.
“Retailers are most concerned about jobs and income,” Hoyt says. “The economy is not adding jobs fast enough to lower unemployment. Wage growth remains weak, and it is not putting the cash in the pockets of consumers that retailers would like to see.”
According to the U.S. Bureau of Labor Statistics, the national unemployment rate was 7.7% in December, the lowest since February 2009, but still higher than anyone would like.
The good news
Although the economy remains troubled, corporations have managed to thrive. By piling up mountains of cash, they have positioned themselves for a fresh round of capital and labor investment when the time is right.
“Businesses are in excellent financial health; their costs are down and they have become highly competitive and profitable,” Koropeckyj says. “Employers have little slack in their labor forces so layoffs have declined dramatically.”
Other sectors of the economy also show improvement.
“Banks have never been as well capitalized or as liquid,” she says. “Households have aggressively worked down their debt burdens and are meeting their obligations more diligently.”
How about housing, that all-important driver of economic health—and mattress sales? While far from robust, it’s on the mend.
“Residential construction and home sales have been trending up since mid-2011,” Koropeckyj says. “Residential construction-related jobs are also slowly creeping up. The months of inventory of new homes are low, having fallen below five months, and existing-home inventories have stabilized around 6.5 months, not far from the normal rate.”
Thanks to tightening inventories, housing prices are showing signs of a rebound after a dismal few years.
“Other signs of a healthier housing market include a rapid decline in the rental vacancy rate, stabilization in homeowners’ equity, and low early-stage mortgage delinquency rates,” she says.
Koropeckyj adds that record low mortgage interest rates and the expansion of the Home Affordable Refinance Program are boosting mortgage refinancing. “That will help to free up household cash to spend on other consumer goods, as well as prevent some additional foreclosures,” she says.
Housing, while improving, remains challenged. Most members of the National Association of Homebuilders feel market conditions remain poor. Home construction in general is barely up from a 40-year low. Home sales remain near their 1990s pace. And financing in general remains a problem.
“Mortgage lenders are still wary about extending credit,” Koropeckyj says. “The high share of homeowners with negative equity also constrains the housing market.”
Given the distance still to go for housing, it’s apparent that the industry will not play its traditional role of stimulating an economic rebound.
“We’re not going to see housing lead the way out of recession,” says Walter Simson, principal of Chatham, N.J.-based Ventor Consulting. “That’s because banks were hurt too badly (by the financial meltdown of 2008) and housing prices were in a bubble. So gains will need to come from other areas.”
One such area is exports.
“Over the last several years the dollar-to-euro exchange rate has stayed in a narrow band,” Simson says. “That means Europeans can purchase American goods without too much punishment.”
Another promising area is onshore production.
“I am seeing some companies pull their production lines back into this country from China and other countries,” he says. “That’s especially so with high-value and mission-critical items. The reason is that foreign operations can make companies vulnerable from a logistics standpoint.”
Simson is optimistic that these factors will help pull the economy back into good shape.
“We will see a rebound because bank capital is getting stronger every quarter and household debt is being reduced,” he says.
Positive vibes also are coming from a renewed interest in top talent.
“The market for financial professionals, controllers and accounting managers has rebounded sharply,” Simson says. “The mood in the financial corner of the executive suite is much better. It’s an early sign of good news that companies are interested in those skills again.”
Other observers also see glimmers of improvement. By the fall of 2013, Moody’s expects major market uncertainties to be resolved as lawmakers bridge their differences, raise the U.S. Treasury debt ceiling and agree to longer-term tax and spending policies.
“Combined with the Fed’s aggressive actions and a more stable Europe, all of this will ease business fears,” Koropeckyj says. “Growth will accelerate, and unemployment will begin to fall.”
If those are optimistic words, Simson points to another easily overlooked factor: While the economy’s growth is disappointing, it also is continuous. The expected 2.4% GDP boost in 2013 is, after all, not far off the historic norm. The problem, he says, is that we became too accustomed to the rapid escalation of the flush years.
“We took the ‘candy high’ of the real estate and financial bubbles and thought such rapid growth was normal,” he says.
Maybe an old proverb applies today: Patience will be rewarded.
“The current growth rate is not enough to make you jump up and down, but it keeps people off the streets,” Simson says. “I see 2013 as good as 2012 and 2014 getting stronger.” ●
Phillip M. Perry is an award-winning writer who has published widely in the fields of business management, workplace psychology and employment law and is syndicated in scores of magazines nation-wide. He is past editor of a leading communications magazine and served as business editor of a major industry newspa-per. He is the author of Management, Retailer’s Complete Guide to Bigger Sales and China Business Directory. Perry also is a regular contributor to BedTimes, Sleep Savvy’s sister publication. He can be reached at email@example.com or 212-274-8694