Cheer up — it’s a new day and the beginning of a new year. What could possibly go wrong?
This story first appeared in the January 4, 2013 issue of WWD. Subscribe Today.
For pessimists who view the glass as half empty, plenty. A United Nations report published last month called “World Economic Situation and Prospects 2013” said growth in the euro area is predicted to average a 0.3 percent rise this year versus 2012’s 0.5 percent contraction. In the U.S., economic growth is expected to decelerate to 1.7 percent this year from an anemic 2.1 percent growth rate in 2012.
For optimists, those projections are merely baseline estimates. The U.N. report also predicted that the world economies will grow in 2013 in spite of the weaknesses in the major industrialized countries due primarily to high unemployment, heightened sovereign risks and fiscal tightening.
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According to the report, world output is forecast to grow 2.4 percent this year, up from 2012’s rate of 2.2 percent. Growth in world trade is also projected to expand “at a rather tepid pace of 4.3 percent in volume terms in 2013, compared to 3.3 percent in 2012.”
As for the U.S., economists and retail analysts in general are expecting modest growth in retail sales and stable consumer confidence in the first half of 2013.
And there even could be better news down the road.
According to The Kiplinger Letter, a forecasting publication for executives, “GDP [gross domestic product] growth in the first quarter isn’t likely to exceed an annualized pace of just 1 percent or so.” But it’s predicting more steam ahead in the second half, when it said growth will rise at close to a 3 percent pace. The firm forecasts that consumer confidence will continue to improve as home prices and employment rise. Furthermore, waning productivity gains will force businesses to “step up hiring and/or business spending on equipment and technology.”
Sam Stovall, chief equity strategist at S&P Capital IQ, said at a New York Society of Security Analysts presentation Thursday that with the resolution of the fiscal cliff, there’s less of a chance now of a Congress-induced recession, and the economy has a greater “risk to the upside than the downside.” His firm’s projection is for higher growth in the back end of 2013.
While forecasts can be wishful thinking at best, what do financial executives who view operating data on a regular basis see as the current consumer and business patterns as 2013 begins?
Marc J. Leder, co-chief executive officer of private equity firm Sun Capital Partners, said, “The current overall macroeconomic picture remains broadly the same [as a year ago], as we foresee generally a low- to no-growth environment. However, revenue trends continue to vary meaningfully by industry sector.” Leder noted that last year, Sun saw the restaurant sector improve from being “mostly flat in 2011 to showing signs of slow growth.”
Because Sun invests in a wide range of sectors — it has operating companies in the consumer products, food and beverage, restaurants and retail groups — it gets a fairly good macro picture of what’s going on at the business and consumer levels.
As for consumer spending at retail, Leder said Sun doesn’t yet have final results for 2012, but its retail companies are “expecting to end the year on a higher note than 2011, with modest holiday season sales growth over last year.”
Sun’s retail holdings in the U.S. include apparel and home retailer Gordmans, specialty chain The Limited Stores and discounter Shopko Stores.
Ron Friedman, retail practice leader at Marcum LLP, an accounting and consulting firm, said many of his clients were in a good financial position at the start of the holiday selling season. “Corporations in general have better balance sheets than they did a few years back,” he said. That’s due to lessons learned from the deep downturn that began in December 2007, with many doing more at the same level of sales, but with reduced staff.
“Retailers in general have been operating smarter and maintaining better inventory levels. My clients who supply the retailers at the manufacturing and distribution level have balance sheets that were clean all year. They have been buying closer to the season, and buying smaller quantities,” the accountant said.
Friedman expects some pullback on discretionary spending now that consumers will no longer see the benefit of the payroll-tax holiday in their paychecks. That’ll mean businesses will continue to plan for growth, but curtail some capital expenditures. For example, retailers may open fewer stores than originally planned. For manufacturers hoping to expand through the creation of a new division, 2013 may not be the year those plans are put into place, Friedman suggested.
Sure, there still are risks ahead, such as a deepening of the European recession and the possibility of a hard landing in China. In the U.S., one reason why many forecasters expect greater growth in the second half is because while resolution of the fiscal cliff has averted many of the tax increases that would have kicked in on Jan. 1, there’s still another bout of brinkmanship ahead in two months when U.S. lawmakers will have to deal with the debt ceiling.
Nigel Gault, chief U.S. economist for IHS Global Insight, expects a deal will be struck at the last minute to increase the debt ceiling and replace the sequester with tax increases through limits on deductions.
The sequester involves automatic steep government spending cuts put into effect in 2011 to prevent the U.S. from defaulting on its debt, and is aimed at allowing the federal government to spend only what it gets in revenues.
Those uncertainties, such as how the U.S. will increase its revenue receipts, can make some firms want to hold off on certain expenditures, such as adding to their staffing needs.
David Freschman, a certified public accountant turned venture capitalist and ceo of FashInvest, cautioned that the financial issues facing lawmakers aren’t necessarily the same ones companies should be focusing on.
“You don’t worry about it because you could be completely wrong in your guess,” he said.
His advice instead is on focusing on what is known, such as the likelihood of tax increases. “Companies should run business to maximize profits, not focus on minimizing taxes. You know paying taxes are inevitable, so companies should plan around it,” he said.