Retail Outlook: Choppy Waters but Favorable Winds Ahead


Consumers are expected to shift their spending from goods to services but a generally robust economy should help retail sales grow 4.5% 

Retailers, especially those that sellmattresses and other home furnishings, face a more challenging operating environment in 2022, analysts say. After another year in which pandemic-sequestered consumers spent heavily on merchandise for the home, they are expected to shift a greater portion of their disposable income to restaurants, theaters, travel and other entertainment — things Covid-19 largely had put off-limits.

“Our current 2022 forecast is for a 4.5% increase in core retail sales,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics, an economic research, modeling and consulting firm based in New York. “That represents a historically average growth rate. Service spending, in contrast, is expected to grow by 9.4%.” (Core retail sales exclude the volatile auto and gasoline segments of the economy.) 

The 2022 retail sales forecast represents a considerable drop from the 16.2% spike expected for 2021 when numbers finally are tallied, but it is fairly robust given the difficult year-to-year comparison. Helping to generate sales this year will be a healthy economy’s strong tailwinds: growing employment, rising wages, a booming housing sector and aggressive corporate investment. 

“The nation is in the midst of an early economic recovery after the body blow of Covid-19,” says Bernard Yaros Jr., assistant director and economist at Moody’s Analytics. “Though growth will decelerate in 2022 due to fading effects from business re-openings and past fiscal stimulus, the economy will remain robust.” 

The numbers tell the tale. Moody’s Analytics forecasts real gross domestic product to grow 4.3% this year. While that pace is less aggressive than the 5.8% increase of the previous 12 months, it remains decidedly sunnier than the 3.4% pandemic-fueled decline in 2020. (GDP, the total of U.S. goods and services, is the most commonly used measure of economic growth. Real GDP adjusts for inflation.) 

Headwinds, of course, are inevitable. The coming 12 months will have their own troubling mix, starting with the peekaboo pandemic. Prepare also for labor shortages, sluggish supply chains, nascent inflation and unsettled consumers. Yet economists do not expect negatives to prevail. While the Delta variant continues to cause economic harm and the new Omicron variant is worrisome, economists expect — or perhaps hope — subsequent waves will be less disruptive. “Labor and goods shortages will ease as the domestic and global economies increasingly learn how to live in a new pandemic normal,” Yaros says.

Corporate sales, profits are up

Business owners tend to confirm the economists’ reports. “Most of our members have seen a healthy return of revenues and are doing about 90% of their pre-Covid business,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers group with more than 370 member companies. With its diverse membership in food processing, defense, fabrication and machinery building, Palisin’s association is something of a proxy for U.S. industry. 

Moody’s Analytics expects corporate profits to increase 4% in 2022. The pandemic continues to make year-over-year comparisons challenging: In 2021, corporate profits spiked 36% over 2020. But those heftier 2021 earnings should help companies weather this year’s array of challenges. “Corporate profit margins have been running somewhat above their five-year average of 11.1%,” Yaros says. “That should provide some ability to absorb price pressures that have developed from rising commodity prices and global supply chain issues.”

Clearly, everyone is glad to bid adieu to pandemic-battered 2020, when corporate profits declined 3%. 

“Our members are optimistic and expect current levels of demand to continue well into 2022,” Palisin says. “They’re expecting to continue to hire, as well. Our annual wage and salary survey usually projects between 400 and 500 job openings for the coming 12 months. Now, though, the number is more than 1,000. So, we’re looking at a doubling of the usual hiring activity.”

Aggressive hiring is improving the nation’s employment level, a key driver of retail sales and of the consumer sentiment so vital to the nation’s overall economic health. “Unemployment has been declining pretty steadily,” Hoyt says. “Jobs are being added at a rate that prior to the pandemic would be viewed as astoundingly good.” Unemployment for 2021 is expected to be as low as 4.6% when final figures are tallied, and should decline to 3.5% by the end of this year, a level not far from the “full employment” conditions of the pre-pandemic economy.

Any tight labor market is likely to prompt wage hikes that put money in shoppers’ wallets and drive positive consumer sentiment. Today’s economy is no exception. “We have seen a significant increase in wages over the past year — as high as 20% to 25% for lower hourly entry-level employees or machine operators,” Palisin says. Nationwide, increases are running lower, due to normalization of wages in some industries. 

“In 2022,” Hoyt says, “we’re looking at 2.6% growth in the Employment Cost Index, compared with 2.9% for 2021 and 2.6% in 2020.” (Many economists consider the Employment Cost Index to be the best measure of actual wage rates.) 

Of course, wage rates aren’t the only component of an employer’s labor cost. Toss into the mix a greater number of people employed, a greater number of job positions filled, an increased number of hours worked and the total comes to what economists dub “wage and salary income.” And it’s clear that employers nationwide will shell out more for that in the coming 12 months. “In 2022, we’re looking at about 4.6% growth in wage and salary income, coming off a 7% increase in 2021, which was up from 1.3% in 2020,” Hoyt says. 

All that additional income should encourage shoppers to spend more — and many consumers have saved up considerable sums of cash ready to be spent. Throughout 2020 and early 2021, after-tax income rose much faster than had been anticipated prior to the pandemic because of a massive fiscal stimulus from federal and state economic impact checks and expanded unemployment insurance payments. At the same time, consumer spending ran lower than anticipated, especially in the early days of the pandemic. “People now have a huge amount of savings,” Hoyt says. “Furthermore, consumer credit card borrowing has been weak, leaving consumers more flexibility to borrow money going forward if they choose to.”

Building is back and housing is hot

Retailers benefit when businesses invest in capital improvements, Palisin says. “Our members, in general, are expanding, building new warehouses and manufacturing facilities, and buying new equipment. We are seeing a special uptick in the automation category because of the labor supply issue.”

Nationwide, the picture is the same. Moody’s Analytics expects capital investment to increase 8.2% for both 2021 and 2022, another welcome rebound from the 5.4% decline in 2020. “Investments in information processing equipment and software are well above pre-pandemic levels as businesses have boosted their IT budgets,” Yaros says. 

The economy also should benefit from more spending on commercial structures. “We’re going to see more nonresidential construction,” says Bill Conerly, an economics and business consultant in Lake Oswego, Oregon. “It will be strongest probably in warehouses and light industrial, but also suburban offices. Early indicators, like the Architectural Billings Index, are looking positive.” 

This will be a welcome change from recent flat activity, which Conerly attributes to the long lead times characteristic of such construction and a lack of new projects in the early days of the pandemic. “In early 2020, nobody was signing papers to acquire land or do new projects,” he says. “So, what we see going on now are projects that were planned pre-pandemic or with short lead times.”

Ready money is fueling the trend. “For the most part,” Palisin says, “our companies are able to access funds for hard capital investments and lines of credit. Financing has loosened up since a year ago.”

On the residential side, housing starts are running about 15% higher than pre-pandemic levels, according to Moody’s Analytics. New home buyers tend to shop a lot at retail stores, and the prediction for the housing industry is full steam ahead. “Annual growth in housing starts will remain strong because of favorable demand-side factors, namely demographics and excess savings,” Yaros says. Increases for 2022 are expected to top 11.9% — aggressive by historical standards and slightly higher than the 10.6% gain posted in 2021.

Eager consumers continue to bid up the prices of single-family homes. When final numbers are in, housing prices are expected to jump 17.5% in 2021, a considerable improvement over the previous year’s increase of 10.4%. As for 2022, Moody’s Analytics expects increases to decelerate to 4.6%, thanks to difficult year-to-year comparisons. 

A hiring boom

The generally favorable economic forecast is not without its clouds. As most retailers will attest, ambitious hiring initiatives are colliding with a scarcity of candidates. “Our members are having difficulty finding enough workers, especially for entry-level jobs,” Palisin says. “The average time to hire has doubled from what it was prior to the pandemic.”

Nationwide, job openings recently topped a record-shattering 11 million — a huge increase over the 7 million pre-pandemic level. “The No. 1 concern of businesses going forward will be finding qualified labor,” Yaros says. “There have never been so many open positions across every industry and government, but the need for more workers is especially acute in manufacturing, transportation, educational services, health care, and leisure and hospitality.”

The reasons for the scarcity are diverse. Some fear the risk of Covid-19 infections in the workplace. Others can’t find the job they want. And many pandemic-shocked people are reassessing their life missions and pursuing new ventures. “There has been a significant drop-off in labor force participation as folks were forced into retirement or are staying home to deal with child care or other dependent care issues that are more difficult to handle in the current environment,” Hoyt says. 

A number of factors may help relieve the labor crisis in 2022. These include the end of bonus unemployment insurance, the waning effect of stimulus payments, lower Covid-19 infection rates and a return to in-
person schooling.

Struggling with supply chains

The tight labor market is helping to fuel another retail headache: a global breakdown in the efficient distribution of goods. 

“The most important problem for retailers is a supply chain that is still broken,” says Bob Phibbs, a retail consultant known as the Retail Doctor, based in Coxsackie, New York. “Smaller operators who lack buying clout are finding it especially difficult to get product.”

At the root of supply chain disruptions is a lack of sufficient workers, analysts say. When people aren’t available to do the work, efficient production and transportation fall by the wayside. Retailers are hurt when cargo ships pile up at ports, causing delivery delays and leading to widespread price increases for components and finished goods.

Delivery disruptions may persist for some time. “Recently, a vendor told me they didn’t expect production to be back to where it should be until the middle or end of 2023,” Phibbs says. “And the prices for components have gone up so much that, in many cases, it is no longer profitable to keep making some products.”

Supply chain disruptions are causing companies to look at alternative regional or local sources. “Many businesses are no longer relying on any single supplier or global region for goods and services,” says John Manzella, a consultant on global business and economic trends in East Amherst, New York. “They are building more diversified and reliable supply chains. Instead of buying in scale from two very large Chinese suppliers, they might buy in smaller increments from a half-dozen suppliers located in different regions of the world. They may also utilize more long-term warehousing facilities. This strategy, which adds costs but reduces risk, will be extremely beneficial in protecting against the next pandemic, black swan or trade war.” Finding alternative sources, though, can be easier said than done. 

What to watch

As retailers enter the early months of 2022, economists suggest watching a number of leading indicators for an idea of how the year will go. The first is the state of consumer confidence — a vital driver of retail sales.

Given favorable wage and income trends, you might expect that consumers are feeling fairly good. In the closing months of 2021, though, they were surprisingly unsettled. “It really is difficult to get a good sense of consumer confidence in the current environment,” Hoyt says. One reason, of course, is the unclear path of the pandemic. But another is the recent spike in prices for fuel and other goods. 

“Inflation will be the key financial statistic to follow early in the year,” Yaros says. Moody’s Analytics calls for growth in the core Personal Consumption Expenditures Price Index to moderate to 2.2% in the fourth quarter of 2022 as the effects of past fiscal stimulus fade. (The core PCE price index excludes energy and food prices.) Retailers also should watch for higher levels of persistent inflation that might cause the U.S. Federal Reserve to increase interest rates, a move Moody’s Analytics does not anticipate before 2023.

Yet another leading indicator will be people returning to work. “More people getting back on the job would confirm a strong 2022,” Conerly says. “Are employers getting the workers they need? Are people earning more money to spend?”

Finally, one nonfinancial force may be more important than anything else. “The damage done by the Delta variant has taught us that the pandemic is still alive and has the potential to disrupt economic activity,” Hoyt says. “Early in 2022, the leading data will be about Covid-19. What are the trends in vaccination rates? Infections? Hospitalizations? Deaths?”

Favorable answers bode well for robust retail sales.

Phillip M. Perry, an award-winning writer who has published widely in the fields of business management, workplace psychology and employment law, is syndicated in scores of magazines nationwide. He is past editor of a leading communications magazine and served as business editor of a major industry newspaper. He is the author of “Management,” “Retailer’s Complete Guide to Bigger Sales” and “China Business Directory.” He can be reached at