NEW YORK — Fiscal discipline is a double-edged sword for the apparel industry.
The same actions that have helped to preserve profits in a tough marketplace — production outsourcing, cost controls and expense reductions — have also taken a massive toll on apparel jobs, reducing the ranks of apparel and textile workers by over 105,000 in the past 12 months.
But the apparel industry hasn’t been alone in its proclivity for cutting and slashing, allowing the issue of employment to hang over the current economic recovery like a cloud.
U.S. economic growth accelerated at a 5.4 percent clip in the third quarter, according to a survey of economists, and is expected to expand 4 percent in the fourth. Still, economists and analysts worry that, without real recovery in employment, recent gains may be unsustainable.
Except for the unemployment rate of 6.2 percent, the signs have been promising for a few months now. Corporate America has started spending again, investing cash from the last two years back into businesses and at the same time pushing productivity improvements to levels never seen before.
Consumers are concerned about the job market, but the affluent and acquisitive are again back in the stores buying luxury and better goods, and there’s been a modest improvement in more moderately priced merchandise in recent months.
Consequently, many have concluded that the Grinch will not steal Christmas this year.
The National Retail Federation is anticipating a healthy holiday season, with 5.7 percent growth in retail sales over the disappointing 2002 holiday season. That would bring holiday spending to $217.4 billion, NRF said. In 2002, holiday sales rose just 2.2 percent to $205.6 billion.
Even though retailers are relying less on the season for its contribution to the annual bottom line, the results can still make or break yearend numbers. NRF said that last year, holiday retail volume accounted for 22.7 percent of total retail sales. For smaller retailers, according to NRF spokesman Scott Krugman, the season could contribute up to 40 percent of total sales.
Some view the 5.7 percent projection for holiday sales as too optimistic.
Surveying the retail landscape, Jim Rice, senior vice president at Sands Credit Services, expressed caution: “We had a nice little burst in July and August, and then it seemed like it was not sustained. Back-to-school came later for some retailers. While some did well in early September, there were others who did well in August, but then [lost ground] in September.“I’m not pessimistic about the holidays, but right now 5 percent gains feel a little rich. While I think we’re in a bit of a recovery, it does feel like a shallow one.”
The uncertainty about holiday sales makes stores’ investment in inventory a bigger gamble than usual. Frank Badillo, senior economist at consulting firm Retail Forward Inc., advised retailers about the need to be “careful to keep expectations about consumer demand under control.”
So far, he observed, much of the recovery has been driven by a series of one-time events. They include mortgage refinancing that helped free up dollars in the household budget, tax cuts and child-care tax credits, as well as retail price cuts that helped clear selling floors.
“Those one-time factors have driven the pace of sales at the end of the second and through the third quarters. We’ll probably start to see some of those one-time impacts on sales start to dissipate as we move into the holidays. What we need is something to step in to pick up the slack, preferably job growth, to sustain the rebound going forward,” the economist said.
His concern is that fourth-quarter improvements will plateau or dip in part because of the lackluster jobs outlook. “For apparel retailers, what I fear will happen this holiday, based on demand in the last few months, is that they will significantly increase their inventories on the expectation that the pace will quicken during holiday,” Badillo said. “What could result is that retailers will be stuck with more inventory than they would like to have. We could then see more promotions and price-cutting than we had last year.”
The economist also raised concerns about the impact of the state of joblessness on retail sales.
“While recent unemployment claims showed a dropoff, my fear is that even if we see some improvement in the job market going into holiday, it may not be enough to have a significant impact on sales. It usually takes a number of months for a turnaround in the job market to [translate] into significantly strong retail sales,” he said.
Badillo noted that strong sales results at Wal-Mart and Target could be the result of more higher-income families heading down channel in search of bargains while households of more modest means, fearful over job cuts, buy less.For Walter Loeb of the retail consultancy firm that bears his name, a 5.7 percent rise doesn’t necessarily reflect a happy and healthy holiday season.
“I see a slight uptick in consumer sentiment, but not a great surge. You have to remember that last year, we had a very weak fall season, which will result in easy same-store comparisons this year. It means you have to go back two or three years to see what the momentum should be. Based on that, I don’t see a huge uptick. Retailers, so far at least, have kept inventory levels lean,” he explained.
Job insecurity is one reason why. The confidence of consumers in their ability to hold on to their jobs is often considered an indicator of their willingness to loosen their purse strings.
According to The Conference Board’s Consumer Confidence Index, in September the percentage of those expecting improvement in the job market fell to 16.7 percent from 18 percent the month before. Moreover, those expecting lower job availability increased to 21 percent from 18.6 percent.
So far, businesses have chopped three million workers from their payrolls in the past three years. More than 23 percent of the unemployed have been out of work for six months or more.
Plus, the official unemployment rate of 6.2 percent can be misleading. Not counted are those considered ineligible such as the new graduates or individuals who joined the ranks of the “self-employed” because they couldn’t find full-time work.
More important is the jobs-created statistic, and there the signs aren’t all that encouraging.
According to statistical comparisons compiled by KiplingerForecasts.com, 57,000 jobs were added to the payrolls in September. That in part is offset by the 41,000 positions lost in August. The dot-com predicted that on a net-net basis, no new jobs will be created in 2003. Actually, that’s not too bad, considering 220,000 jobs were lost in 2002.
While Kiplinger is predicting a million new jobs will be created in 2004, others now believe that many of those lost jobs may never come back. The reason? The push for productivity gains has changed the way firms operate, resulting in a structural change in the jobs front.“When you have a structural change, it is hard for new jobs to be created,” Loeb noted. “Very often, there are no new jobs for a while and many individuals are left unemployable because they don’t have the new skills that employers require.”
Another shift is in job location, frequently to overseas locales, which could be one of the sleeper issues in next year’s presidential election. “People are starting to wake up to that realization,” Loeb added. “It will be interesting to see what President Bush does to create jobs as he campaigns to get reelected.”
Louis Capelli, chairman of Sterling National Bank, believes that the upcoming election will give the recovery the momentum boost that is needed: “The rise in the Dow Jones Index makes people feel better. That is a good step because so many people are touched by what goes on in the stock market, whether it is personal savings or the value of a 401(k) account.”
He expects the gains to pick up steam as we head into next year. “The statistics bear out that election years are good economic years. Many people vote with their pocketbooks, and President Bush and his administration will try to make [an economic recovery] happen because he wants to be reelected.”
The bank chairman also touched on how technology has contributed to structural change in the workplace.
“Look at how information gets processed and how fast it happens,” Capelli said. “Many companies had secretaries handling those tasks, but now a lot of the executives do their own typing and answer queries by e-mail. Many of those secretarial positions are now eliminated.”
Gary Wassner, president of factoring firm Hilldun Corp., echoed those sentiments. “If we weren’t as technologically advanced as we are here, we would have needed 15 more employees,” he said. “As it is, I’m trying to streamline the process further and eliminate data entry, replacing it through the receipt of electronic files where possible.
“There are certain documents for financial reasons that you know you have to touch and feel the paper and see the signature. I can’t replace the person who does that. But in the other context, the elimination of data entry means at least one job position that I won’t need to fill,” he said.Anne Maxfield, president of staffing firm Project Solvers, noted that the lion’s share of jobs shipped overseas have been in production, technology, pattern making and back-office functions. “I do think that firms still have to have design here,” she asserted, “but what is going to happen three to five years from now? Will we have these huge holes where we need people to fill jobs? I keep hearing about baby boomers retiring and how the job pool will shrink. The reality is that the retail and apparel industries are still going to retain a certain amount of domestic production. They are not all going to become 100 percent importers.”
Robin Lewis, a strategic adviser to retail and apparel firms, isn’t sure he agrees with Maxfield: “We are following a seemingly slow slide into losing our entire manufacturing base and going from an industrial power to a totally consuming economy. That means that we no longer create value.”
Lewis pointed out that there is one school of thought that holds that the transition can be successful if value can be created in service industries such as marketing, media, communications and research.
“Regardless of how much money we put into the consumer’s pocket, at least in apparel there remains a huge fight to steal that share of the dollar away from three other competitors,” Lewis commented.
Retail Forward’s Badillo remains cautious about the retail sector’s ability to create enough service jobs to provide the much-needed boost to the economy.
He believes that while the worst may be over for upper-income households, who will benefit from stock market gains, continued weakness in the job market will hold back the middle- and lower-income households, which could mean a negative sales hit for discounters and other value-oriented retailers.
“The gains from technology mean that certain jobs will no longer be needed. I think you’ll see continued weakness among manufacturing and service jobs,” he said. “Retail remains one of the biggest providers of service jobs, but retailers have been closing stores over the past year and you’ll probably see more consolidation in the department store sector. A shakeout at retail will have a big drag on service jobs.”The economist also sees a particular need for qualified workers in frontline retail posts. “The younger labor pool is increasingly comprised of immigrants. As that pool matures, there’s going to be a need for training programs to improve language skills of cashiers and associates,” he observed.
Saul Langer, president of Israel Discount Bank’s factoring unit, bases his optimism about the economic outlook on his experience as an executive and also as a consumer.
“For the first six months of this year, it was very difficult to attract clients. Starting in July, we began to see a pickup from our apparel clients,” he said. “Even in my own spending, I’ve just started buying again in the last couple of months. I’ve had a suit made along with a couple of shirts.”
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