Retail Forecast: Steady As She Goes

Steady as she goes. That old nautical phrase, urging a firm hand on the wheel and an unwavering eye on the compass, seems apt for today’s retailers. While economic waters remain troubled, an improved economic forecast promises retailers a smoother route to profitability in 2014.

“The economy is on the verge of stronger growth, more jobs and lower unemployment,” said Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics (economy.com), a research firm based in West Chester, Pa. After four years of recovery, she added, the economy has made big strides. “Business balance sheets are as strong as they have ever been, the banking system is well-capitalized, and households have significantly reduced their debt loads.”

Market Rebound

The more optimistic outlook is reflected in an anticipated rebound in the nation’s gross domestic product. In 2014 the GDP is expected to climb at a 3.1% rate, according to Moody’s. That’s good news, given that the increase for an economy in average growth mode runs at 2.5%.

“We think things should be looking up considerably next year,” said Scott Hoyt, senior director of consumer economics for Moody’s. “The economy should be significantly better not only than the past 12 months but also the past several years.”

Maybe it’s expected to increase rapidly, but the 2014 GDP number is being calculated off a pretty low base. Many retailers won’t be surprised to hear that 2013 did not measure up to economists’ expectations. Indeed, when numbers are finally tallied, the GDP increase is expected to weigh in at around 1.6% for the year, well below the anticipated 2.1% rate. The culprits: global economic weakening and governmental dysfunction — two factors that shocked consumers in 2013 but that are expected to be less important to economic activity in the months ahead.

Retail Growth

Consumer attitudes — and shopping patterns — are expected to rise in tune with the rosier economic melody.

“Core retail sales are expected to grow 4.1% by the time 2013 figures are finalized, and by 4.5% in 2014,” Hoyt said.

That’s a pretty good showing, given that 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.)

Keep in mind, however, that these numbers are not as high as the 4.9% figure clocked in 2012 and the 5.4% of 2011. What’s going on?

“A lot has to do with continued weak income growth,” Hoyt explained. “While we do have some job growth, there is continued high unemployment. A lot of people have dropped out of the labor force, and employers have more power to restrain wage growth.”

No rapid relief in that sluggish employment picture is within sight. Moody’s

expects the current unemployment rate of 7.3% to slowly decline to 6.8% by the end of 2014. A “full unemployment” 5.5% figure is not expected to be reached until early 2017.

Wary Shoppers

Many shoppers, to be sure, are constrained by this less-than-bright employment picture.

“Some retailers have been telling me that shopping activity tends to fall off dramatically toward the end of each month,” said Walter Simson, principal of Chatham, N.J.-based Ventor Consulting (ventorllc.com). “This seems to indicate that many people are living hand to mouth. While they are willing to spend for what’s necessary, there’s a big part of the population that has no extra gas in the tank. This pattern has to be broken for any dramatic improvement to occur in the economy.”

While employment has not fully rebounded, Simson said retailers will still benefit, on balance, from the generally improved revolving debt picture.

“Consumers have repaired their credit and are willing to put a little more on their cards,” he explained. The lighter weight of consumer debt should free up the marketplace for livelier selling.

To benefit from the economic rebound, retailers need to resist the urge to cut too deeply into labor costs.

“Shoppers are complaining about having no one to help them,” Simson said.

Store personnel, he added, must also be trained in the art of giving customers good reasons to buy. “We will not go back to the days when customers plunked down their cards unthinkingly.”

Philip M. Perry is a New York City-based business writer.