Economy Poised for Growth in First Half

Providing the fiscal cliff is avoided, economists and retail analysts expect modest growth in retail sales and stable consumer confidence.

WASHINGTON — Economists and retail analysts, working on the assumption that a “fiscal cliff” will be averted in Washington, expect modest growth in retail sales and stable consumer confidence in the first half of 2013.

This story first appeared in the December 12, 2012 issue of WWD.  Subscribe Today.

As retailers head out to trade shows and regional marts across the country in the next six months, they face an uncertain economic environment, buffeted by uncertain government policy, a recession in Europe, a slowdown in Asia and a cautious but seemingly more confident consumer.

How it ultimately translates into sales performance, pricing power and hiring is difficult to predict, but with many economists forecasting a period of stable growth in the economy in the first half, merchants could be looking at a slight uptick in business.

IHS Global Insight chief U.S. economist Nigel Gault said ground is being prepared for faster growth.

“Credit conditions are gradually easing, while household demand for the traditional drivers of recovery — vehicles and houses — is gaining momentum,” Gault said. “If we can move toward a credible long-term deficit-reduction plan — and at the same time avoid tightening fiscal policy too much, too soon — the combination of a continuing housing recovery with a return of business confidence should see growth accelerate sustainably over the course of 2013 and into 2014.”

The Obama administration and Congressional leaders are jockeying this month for the upper hand in the negotiations over an automatic package of tax hikes and deep spending cuts that will take effect on Jan. 1 and hit the economy hard unless the power players in Washington can reach a compromise to avert it.

Retailers are keeping a close eye on the outcome of the negotiations, as they plan for the new year, and many corporate chief executive officers have taken part in meetings at the White House with the president to voice their concerns and ideas on how to rein in the nation’s deficit and maintain economic vibrancy. The White House released a report last month from the National Economic Council and the Council of Economic Advisers warning that if the Bush-era tax cuts are allowed to expire on the middle class at the end of the year, a family of four will see its taxes increase by $2,200 next year, “negatively impacting businesses and retailers across the nation.” Faced with tax hikes, White House economists estimate that consumers could spend nearly $200 billion less than they otherwise would have in 2013.

Many American brands count Europe as a key export market, so the ongoing financial problems there are also a cause for concern. Eurostat confirmed that euro-zone gross domestic product edged down 0.1 percent in the third quarter, following a contraction of 0.2 percent in the second quarter. IHS noted that moderate growth in France and Germany failed to offset marked overall contraction in the southern periphery countries. In addition, Dutch GDP plunged 1.1 percent in the quarter, Austrian and Finnish GDP edged down 0.1 percent and Belgian GDP was flat.

IHS said expectations are that the euro zone will suffer further GDP contraction in the fourth quarter, with Germany looking to be in severe danger of contracting in the fourth quarter, as well as France.

“We suspect that the euro zone faces extended modestly contracting or flat quarter-on-quarter GDP in the face of tightening fiscal policy in many countries, high and rising unemployment, limited consumer purchasing power and likely recurrent euro-zone sovereign-debt tensions,” IHS said.

In the U.S., economists are still predicting moderate sales growth next year despite global financial malaise.

“My impression would be that retail sales will grow roughly 4 percent year-over-year in nominal terms,” said John Lonksi, chief economist at Moody’s Capital Markets Group. “It’s not a barn buster, and it is not recessionary.”

Lonski said blue-chip indicators suggest that real consumer spending will grow by about 2 percent next year, which is essentially unchanged from the 1.9 percent growth forecast for 2012. However, he said a slow pace of growth in real disposable personal income — forecast to grow 1.3 percent next year — could impact consumer spending.

“One of the limiting factors on growth of consumer spending will be sluggish growth by employment income or wages and salary,” he said. “We have to keep an eye on the labor market…It very well might be that companies have postponed hiring new workers because of all of the uncertainties stemming from the fiscal cliff, and we may well get off to a slow start.”

The November employment report from the Labor Department did see a drop in the unemployment rate to 7.7 percent from 7.9 percent, as the economy added 146,000 jobs, led by robust retail hiring.

At the end of last month, consumers had strong feelings about the economy. A stronger-than-expected rise in shopping sentiment pushed the November Consumer Confidence Index to levels not seen since February 2008, when the recession was just beginning. The index advanced to 73.7 for November, up from 73.1 in October.

Chris G. Christopher Jr., senior principal U.S. economist at IHS Global Insight, remains positive about the balance of holiday sales and the first half, despite a report released on Nov. 30 showing personal income was flat in October, wage and salary disbursements fell 0.2 percent and consumer spending adjusted for inflation fell 0.3 percent in October.

“I think this will be a blip, and I think consumers will come back pretty strong in November and December,” Christopher said.

On the apparel retail side, Christopher said he expects, in the end, 2012 will wind up being a “relatively good year,” to “drop a little” in the first quarter and then pick up in the second quarter. IHS is forecasting a 5.7 percent increase in apparel and accessories stores sales in the fourth quarter this year, followed by a 3.5 percent gain in the first quarter and a 4.5 percent hike in sales in the second quarter.

However, general merchandise stores, which he said have been dragged down by sales at department stores, are expected to fall 0.7 percent in the fourth quarter and first quarter, but eventually rise 1.5 percent in the second quarter.

In the U.S., Andrew Fitzpatrick, director of investments at Hinsdale Associates, said department stores such as Macy’s Inc. and specialty stores such as Coach Inc. will likely fare well in sales performance in 2013.

“Macy’s is an execution story,” Fitzpatrick said. “They have really gotten to drilling down into where they generate sales, and they have done a really nice job of merchandising and pricing…and they are increasing their margin as a result.”

The general merchandise store sector, on the other hand, is a “mixed bag,” Fitzpatrick said.

“[Stores] like Sears [Holdings Corp.] and J.C. Penney [Co. Inc.] have definitely lagged, and I haven’t seen anything that indicates a turnaround there,” he said. “Wal-Mart [Stores Inc.] is doing quite well. They have done a nice job of going more into groceries and food, and are certainly maintaining the attractive pricing.”

The same holds true for Target Corp., he added.

Fitzpatrick said online retail sales growth is the hottest emerging sector for retailers.


“It is a better return on investment for them, and they will continue to expand it and figure out how to better reach the customer and generate sales that way than in making investment in real estate,” Fitzpatrick said. “There are always retailers that will have momentum and continue to grow their real estate investments, but I think the emphasis right now is understanding how I can surgically get my consumer to shop more — either online or in the store by digitally marketing to them.…When you have comp-store sales in the 2 to 3 percent range and you can grow your digital business 15 to 20 percent, it is not hard to figure out how to grow your business.”

Kevin Regan, senior managing director at FTI Consulting, concurred, “When you look at a category like online sales, it is still growing double digits, and people are embracing that way of shopping,” Regan said.

He also noted that retailers are planning for an economic environment next year that is close to the one they are wrapping up this year.

“I think retailers will still approach the first half with caution, because there is nothing out there that says things are picking up [dramatically],” Regan said.

He pointed to some brick-and-mortar “success stories,” such as Dillard’s Inc., Macy’s and Nordstrom Inc., which he expects to continue, but he noted that the hottest emerging segment will continue to be online sales.