BY PHILLIP M. PERRY
Retailers should enjoy a robust year, thanks to growing employment, rising wages and low borrowing costs
Fair weather ahead.
That’s the economic forecast for 2018. Retailers should benefit from an improving employment picture, growing disposable consumer income and an easy credit environment.
“The United States economy continues to power forward,” says Sophia Koropeckyj, managing director of industry economics for Moody’s Analytics, a research firm based in West Chester, Pennsylvania. “Furthermore, for the first time during the nation’s eight-year expansion there are no serious impediments to growth.”
Brisk tail winds should keep the economy in full sail for the near future. “Consumers are benefiting from a strong job market, their balance sheets are healthy and credit is flowing freely,” Koropeckyj says. “A revival in corporate profitability, record stock prices and rock-bottom borrowing costs are buoying businesses.” Even the global picture is brighter. “All of the major economies are expanding in unison for the first time in a decade,” she adds.
Retailers, in particular, can look forward to improving sales. “We forecast core retail sales will increase by 4.7% in 2018,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “That’s an improvement over the 3.8% increase of 2017, which was virtually flat with the previous year.” (Core retail sales exclude volatile auto and gasoline segments.)
That “flat” part requires explanation. “Last year was somewhat disappointing, largely because of a continuation of the previous year’s deflationary environment and resultant weak retail pricing power,” Hoyt says. “However, the pace of deflation is moderating.” Pricing also should be supported by a lower trending dollar and a strengthening of the global economy.
For 2018, Moody’s expects gross domestic product to grow 2.9%, thanks mostly to stronger growth in residential investment and government spending. That’s a healthy increase from the 2.2% expected to be recorded for 2017 when numbers are finally tallied, a figure that was itself an increase from the 1.5% of 2016. (GDP, the most common measure of economic growth, is the total spending on goods and services by consumers and businesses.)
Retailers looking for expansion capital are in a favorable position. “Banks are eager to lend,” says Walter Simson, principal of Chatham, New Jersey-based Ventor Consulting. “And the borrower has a lot of power when it comes to pricing and conditions of the loan.”
A strengthening labor market should put more spendable cash in consumers’ pockets. “We expect well over 2 million jobs to have been created in 2017,” Koropeckyj says. “This is about the same growth experienced since the expansion began over eight years ago.” Strong job growth resulted in an unemployment rate of 4.4% by the end of 2017, and that’s expected to fall to 3.9% by the end of 2018.
As unemployment declines, employers have more difficulty finding sufficient workers. That bodes well for wage growth and for a resultant increase in consumer income that can be spent at retailers. “Most measures of wage rates are showing some acceleration, and pay increases remain in the headlines,” Hoyt says. Average hourly earnings are expected to grow by 3% in 2018, up from the 2.6% increase of 2017, which was little change from the previous year.
Consumer and business confidence
Confidence among consumers and businesses is yet another driver of growth. Here the news is good. “Consumer confidence remains high,” Hoyt says. “It jumped following the presidential election, and the tapering back down that many of us anticipated has not occurred.”
Businesspeople seem equally confident and willing to take risks. Moody’s expects business investment to increase by 4.5% in 2018, up from an anticipated 4.1% for 2017.
“Nonresidential investment has improved following the swoon caused by the collapse in oil prices,” Koropeckyj says. “Equipment outlays and intellectual property products are both growing strongly. And accelerated wage growth could spur firms to spend more on equipment and technologies that reduce the need for workers.” And then there is the business-friendly environment of the nation’s capital. “A favorable business climate, particularly a relaxation in various regulations, could boost investment spending more than expected,” she says.
Adding fuel to this fire is the upswing in corporate profits, which are expected to rise by 4.5% in 2018, a good increase over the 4.1% figure expected when 2017 numbers finally are tallied. “Low costs and sturdy revenue growth have bolstered profits,” Koropeckyj says. While both conditions are expected to extend over the coming months, stronger profits in 2018 are dependent on the delivery of lower corporate taxes.
Housing activity is another key driver of economic growth and consumer spending. Recently, that vital sector has not been keeping up its burden. “Housing starts remain disappointing,” Koropeckyj says. Moody’s expects 2017 starts to increase by 5.2%, to 1.2 million, when numbers finally are tallied. That’s a disappointment from the projected 1.6 million and represents a rate of increase noticeably below the 6.3% increase clocked in 2016.
The culprit? Not demand (which is robust) and not credit availability (which is strong). It’s the limited capacity for new construction, thanks to a tight labor market. Furthermore, it’s expected that a good portion of available workers will be siphoned off for the reconstruction of buildings damaged by Hurricanes Harvey and Irma. Put it all together and it means a substantial backlog in the construction of both single-family homes and apartments.
Despite the downside risk of labor shortages, Moody’s forecasts a robust 26.1% increase in 2018 housing starts. “The combination of increased housing permits and reconstruction in the aftermath of Harvey and Irma will keep demand for housing starts at a hot burn,” Koropeckyj says.
As pleasant as the forecast is, problems loom. “Lack of retail pricing power remains a big issue, and competition from online sales is a big contributor to that,” Hoyt says. And while higher labor costs carry benefits in the form of more cash in shoppers’ pockets, they also have drawbacks. “There is a challenge to finding and retaining the right workers, and working out what to pay them and still deal with pricing pressures.”
Uncertainties in Washington, D.C., higher than usual, also might cause problems. “We have built some corporate tax cuts into our forecast,” Hoyt says. “If they don’t happen, our forecast is too strong. And if personal tax cuts are instituted, our forecast is too weak. We are also assuming there is some increase in federal infrastructure spending.”
The picture could further darken if President Donald Trump institutes protectionist measures promised during the campaign. “The president has an agenda that is somewhat protectionist, and I think we need the exact opposite,” says John Manzella, a speaker on global business and economics, and chief executive officer of World Trade Center Buffalo Niagara, an international business development organization headquartered in East Amherst, New York. “We actually need more agreements for free trade, which is extremely beneficial to the U.S. economy.”
At least there has been no recent talk about a border adjustment tax, Manzella notes. “That would result in many lost jobs. While the president has focused on the trade deficit, we need to realize that more than half of imports represent intermediate goods used in the production of U.S. products. This makes our goods more competitive around the world. Imports also reduce prices and stretch the consumer dollar,” he says.
Finally, retailers need to keep a watchful eye on the health of the banking industry. “I continue to worry about the strength of the financial system,” Simson says. “When the value of assets such as the stock market and real estate goes up that usually means there is too much easy money in the system.”
The nature of the nation’s increasing debt loads also worries Simson. “Student loans, credit card debt and longer term auto loans are continually increasing,” he says. “So are derivative-backed CDs, which carry high rates of return and carry higher risk than many people realize. Finally, we are also seeing the bundling of loans that got us into trouble in 2008.”
The result? “Maybe some lenders have too many high-risk loans on their books,” Simson says. “If they cannot collect, the whole banking system will again be at risk.”
As retailers enter the first months of 2018, some key indicators should help get a handle on the general economic trajectory. First, Hoyt suggests, keep an eye on what is happening in the nation’s capital. “Will there be a program of fiscal stimulus? If so, that will bolster the economic environment.” He also suggests staying alert to reports of wage increases, which would stimulate consumer spending. Finally, how intense are downward pricing pressures? Are you starting to feel any increase in your own pricing power?
A favorable operating environment can provide the opportunity to strengthen internal controls. “When you foresee a year of steady economic growth, it’s time to take the opportunity to look inside the walls of your organization and determine how you can improve your execution, strategies and financial systems,” Simson says. “Make sure you understand your costs and are ready to react quickly to changes in the market. As for employees, go for the A players rather than settling for the C ones.”
In all cases, emphasize stronger internal operations. “Batten the hatches,” Simson says. “Keep asking yourself, ‘How can I strengthen my organization for the long term?’ ”
How to win the 2018 selling game
A favorable economic climate alone won’t make those cash registers ring a merry tune. Retailers must play the role of inspired conductors.
“The key challenge for retailers in 2018 will be getting people into the stores,” says James E. Dion, president of Dionco Inc., a Chicago-based retail consulting firm. “It used to be that you ran a promotion and gave door crashers and dollars off, and with some luck customers would line up to get in. That isn’t the case anymore. Traffic is down pretty dramatically almost across the board at retail stores.”
The biggest reason for the downward pressure on store traffic is the rise in online shopping. “To thrive going forward, a retailer has to create robust retail and online environments that reinforce each other,” Dion says. “Consumers are doing more online research—and not only about what products are available. They are also checking reviews on social media. Does a certain product work or not? And what are other people saying about the retailers?”
A store’s online presence, then, needs to reflect the greater attention people are paying to cyber reputation. And more: “Retailers need to do whatever they can to save shoppers time,” Dion says. “One important thing is to have real-time inventory available online. The consumer who can see that you have a particular item in stock will be much more likely to come into your store. Another important service is to provide in-store pickup of items ordered online.” The idea is to cater to the shopper’s changing needs.
Of course, Amazon is the most powerful online player, and retailers need to respond appropriately. “There are two avenues to competing with Amazon,” says Walter Simson, principal of Chatham, New Jersey-based Ventor Consulting. “The first is to find and dominate a niche that no one else wants. Amazon is not trying to dominate niche markets but big parts of big markets. So, think small: Is there a 10% part of your market for which you can create a protected position?”
“Second, think about expanding by mergers and acquisitions—a tactic that traditionally has been pursued only by very large companies,” Simson adds. Today, even smaller operators can merge successfully, and even those in different regions, thanks to the growing uniformity of markets around the country.
Finally, retailers must serve the changing expectations of younger shoppers. “As a group, millennials value authenticity,” Dion says. “They have developed good BS detectors. They want companies that walk the talk and behave in a responsible manner. They are a green generation that values renewable energy, so they respond to social messaging and social issues. They also spend more of their discretionary income on experiential things, such as dining out and vacations, rather than merchandise.”
“Millennials have also proven very resistant to traditional ploys used to attract shoppers, such as discount days,” Dion says. So how do you attract them to your store? “Talk to them and find out what they want. They are not all the same, but exist along a spectrum of desires. You need to identify which ones you can best provide,” he says.
ISPA forecasts stronger mattress sales in 2018, 2019
After a year of relatively anemic growth in 2017, the U.S. mattress industry is expected to post stronger gains in both 2018 and 2019, according to a new forecast from the International Sleep Products Association.
The forecast, released in October, 2017, projects that at the end of 2017, mattress unit shipments (mattresses and foundations) will have grown 0.5% over 2016 levels and the dollar value of those shipments will have increased 1%.
But for 2018, ISPA projects a 3% gain in unit shipments and a 4.5% increase in dollar values. For 2019, the forecast shows a 3.5% increase in shipments and a 5% jump in dollar values.
The average unit price is projected to increase 0.5% in 2017 and 1.5% in both 2018 and 2019.
ISPA’s Statistics Committee updates and publishes the Mattress Industry Forecast for the U.S. mattress market (paywall) two or three times a year, depending on market conditions. It is based in part on an economic analysis prepared by the University of Michigan and input from the committee to create a consensus view.
Changes in consumer behavior and market conditions made the most recent forecast challenging, the Statistics Committee writes in a special note at the start of the report.
“In most years, consumer behavior generally—and activity in the bedding sector, in particular—follow the ups and downs of the economy. If the economy is growing, so too are most consumer segments, including bedding. And if the economy contracts, general consumer spending falls and so do mattress sales,” the report says. “This year is the exception. Although economic indicators—including employment, housing, GDP (gross domestic product) and inflation—suggest the economy is steady or even growing, consumers’ purchases in many sectors, from autos to appliances to apparel and fashion—and, yes, bedding—are underperforming the general economy. This disconnect has made forecasting more difficult across the board.”
Other factors that are introducing uncertainty into forecasting include a slow transition at the Federal Reserve from “an extremely low-interest rate environment” since the Great Recession to higher rates; recent natural disasters in California, Florida and Texas; a volatile political environment in Washington, D.C.; and, of course, significant changes within the bedding industry itself.
“Corporate mergers and consolidations at the retail level have altered the number and placement of retail locations, product mix and competition. Long-term manufacturer-retailer relationships have changed,” the report says. “New players have emerged as traditional lines between materials suppliers, mattress manufacturers and retailers have blurred, and sales of motion foundations, boxed bedding and internet commerce, in general, have grown.”
In addition to the bedding forecast, the report provides a national economic outlook and timely analyses by Wallace W. “Jerry” Epperson, a founder of Mann, Armistead & Epperson Ltd., an investment banking and research firm based in Richmond, Virginia; and Ashraf Abdul Mohsen, vice president of economic research for Association Research Inc. in Gaithersburg, Maryland.
For more information, contact Jane Oseth, ISPA member services manager, at 703-683-8371 or firstname.lastname@example.org.
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 can be reached at email@example.com.