By  on June 18, 2014

WASHINGTON — Retailers attending the trade shows and regional marts in the next six months are facing relative stability at home and abroad, but there are still some headwinds, experts caution, including a downturn in the housing market and the threat of rising interest rates from the Federal Reserve.

The U.S. economy is on course to grow modestly in the second half of the year, with consumer spending, employment and retail sales expected to pick up, although economists said there could be a few bumps in the road that slow the pace of growth.

Shaking off the weather-related drag on the economy in the first half, businesses can expect steady employment growth and consumer spending in the second half, pointing to fairly stable fundamentals in the economy, according to several economists and retail analysts.

“The month-to-month wiggles notwithstanding, we are in a stable period here,” said Doug Handler, chief U.S. economist at IHS Global Insight. “We are not talking about risks of a debt-ceiling default or government shutdown [two scenarios that impacted the economy in the second half of last year] or cataclysmic events in Europe or Ukraine. It is a fairly stable time. Employment growth is good, but not great, and that applies to a lot of sectors in the economy. Going forward, I don’t see much disruption to the status quo.”

Handler said the second half should be better than the first half, but “nothing to write home about.”

“One of the more disappointing aspects to our forecast and economic recovery to some extent is the housing sector,” Handler said. “Six months ago, we had assumed that 2014 was going to be a great year because of the housing recovery. It has grown a bit, but not nearly to the extent we expected given the fundamentals we have.”

As a result, there has been a negative impact on the construction of new homes, home building store activity and employment growth in the real estate sector.

“That is one of the reasons we downgraded the recovery from ‘really good’ to ‘not so bad,’” Handler said.

However, IHS is still forecasting a 2.5 to 3 percent increase in overall consumer spending, including services and adjusted for inflation, in the second half.
On the discretionary side, IHS is forecasting an increase for apparel and footwear spending of 3.5 percent on a nominal basis and 5 percent in real terms, Handler said.

“The fact that real spending is growing faster than nominal spending is a statement about pricing weakness,” Handler said. “We will see those pricing pressures continue.”

Moody’s Analytics expects a 3.75 percent annualized growth in real consumer spending in the third quarter and 4 percent growth in the fourth quarter, according to Scott Hoyt, senior director of consumer economics at the forecasting firm.

“Driving that increase are a number of things,” Hoyt said. “We think the economy is gathering momentum. Job growth has picked up and we expect that trend to continue. There is also a lot of pent-up demand out there to be released.”

But Hoyt cautioned that gasoline prices are still high, with oil running about $105 a barrel, which “saps the purchasing power of consumers for discretionary items, which unfortunately hits categories like clothing, shoes and accessories.”

Still, he said a stronger dollar will give retailers bigger margins to discount and lure customers in.

“So what they lose from lack of discretionary purchasing power, I think they will make up with the lower prices they can offer,” he added.

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, said income growth is running on average in the 2.5 to 3 percent range in nominal terms, which is considerably lower than the 6 to 8 percent rate in the last economic expansion from 2002 to 2007.

“Consumption growth is ultimately a function of disposable income and income growth is weak,” Dhawan said. “My forecast is different from others because I also expect a lot of turmoil in the fourth quarter on spending, rising interest rates because of the tapering program of the Fed, the November [Congressional] election and some jitteriness on the part of consumers.”

On the retail sales front, economists and analysts are projecting pockets of strength and weakness but modest growth overall.

Apparel and accessories stores posted a seasonally adjusted 0.6 decline in sales to $21 billion last month, while department-store sales dropped 1.4 percent to $14 billion. Sales at general merchandise stores, a category that includes department stores, fell 0.6 percent to $54.8 billion in May.

An upward revision by the Commerce Department in April’s top-line sales numbers that showed growth of 0.5 percent versus the 0.1 percent originally reported, boosted economists’ confidence that the second quarter could be gaining momentum.

Retail sales should grow about 4.5 percent in the third quarter year-over-year and 5.4 percent in the fourth quarter compared with a year ago, according to Moody’s.

Hoyt said Moody’s is projecting that sales at general merchandise stores, a category that includes discounters and department stores, will rise 3.75 percent in the third quarter and 3.25 percent in the fourth quarter. Sales at apparel accessories stores are expected to increase 2 percent in both quarters and sales at department stores are projected to fall 1.75 percent in the third quarter and 1.25 percent in the fourth quarter.

“We think things are improving and the consumer is starting to get that,” Hoyt said. “Most of the measures of consumer confidence are near their postrecession highs and with the labor market improving, consumer finances are in good shape. The big constraint on spending now is really income, and wage income in particular has been sluggish. As growth there improves, it will feed right through to spending.”

Craig Johnson, president of Customer Growth Partners, said he expects the second half to be better for retailers “not because suddenly the retail economy is running on all eight cylinders, but simply because of the comparison to the first quarter, which was dismal.”

He said the retail environment has been hit with what he calls a “rotation from discretionary spending into nondiscretionary spending that has sucked all of the spending oxygen out of the room.”

As a result, Johnson expects retailers such as Costco, which attributes 75 percent of its sales to food and groceries (nondiscretionary spending), to perform well in the second half.

“We are looking at weakness in a number of categories,” Johnson cautioned, noting that apparel sales were only up 0.7 percent year-to-date through April.
“That is no great shakes and that is why virtually everybody that has reported has had pretty weak numbers,” he said. “A lot of companies are struggling and it has been very promotional.”

Johnson noted he expects department store leaders such as Macy’s Inc. and Nordstrom Inc. to perform well in the second half, while stores such as Kohl’s Corp. and Sears Holdings Corp. could remain “challenged.”

He called J.C. Penney Co. Inc. an “outlier” and expects the retailer to have positive comps as the year progresses, primarily due to comparisons to the second half last year, when the company was in turmoil.

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