NEW YORK — Caution about the job market is holding second-half optimism in check.

Fears about war and terrorism, dominant just six months ago, have receded, and weak sales in the third and fourth quarters of 2002 have set the stage for at least a nominal improvement in top-line performance in the back half of the year.

The Federal Reserve, when it lowered interest rates by a quarter-percent on June 25, said, “Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing.” Because the economy has yet to “exhibit sustainable growth,” the decision to lower the rate was to provide “further support for an economy which [is expected] to improve over time,” the Fed said.

The National Retail Federation last Thursday said its retail sales outlook predicts second-half sales growth of 4.5 percent, more than double the 2.2 percent rate for the first half of the year.

Rosalind Wells, chief economist for NRF, said, “Now that the Iraq conflict has ended, we are all waiting for the economy to show increased vigor. Though there will be lingering economic problems, retailers can expect solid, steady growth in the second half of the year.”

Many analysts and economists share that outlook, and said so when stores reported June results last week.

However, they’ve also shared Wells’ concern that a continued loss of jobs jeopardizes any pickup in retail spending.

Indeed, the job market remains the wild card because of the uncertainty of the future impact that continued rising unemployment levels might have on consumer spending. In June, the U.S. jobless rate rose to 6.4 percent, its greatest leap in nine years. The Labor Department said 9.4 million are unemployed, a figure that includes 1.5 million who are considered ineligible for benefits. About 2 million in June had been looking for work for more than six months.

The first figures for July suggest a continued deterioration in the labor market.

On Thursday, the Labor Department reported the moving average for jobless claims over the past four weeks rose by 1,000 to 426,750 for the week ended July 5. The number filing for benefits in the most recent week indicated that the unemployment line is getting longer, swelling by 5,000 to 439,000. That new figure represents the highest rate of increase in five weeks, and the 19th consecutive week that first-time jobless claims have been above 400,000.The levels of those already receiving benefits have reached new 20-year highs: Over the past four weeks, the average number of people collecting unemployment checks rose by 10,000 to 3.7 million, while, in the most recent week, continuing claims jumped by 87,000 to 3.8 million.

The latest unemployment numbers reflect only those collecting state unemployment checks. The Labor Department said that an additional 854,406 individuals were collecting continued claims under the federal government’s extended benefits program, which is available only to those who have exhausted their 26-week state benefit claims.

Last week, corporate America began reporting second-quarter results. On Thursday, the Dow tumbled as Web portal Yahoo Inc. reported second-quarter results in line with expectations and investors locked in some of their earlier equity gains. Fueling the volatility was the lack of turnaround in the job market as the Labor Department issued its latest statistical report. Monthly same-store sales figures posted by retailers for June were mixed, with indications that they have started slashing prices on summer goods early to avoid a repeat of the inventory backlog that occurred at the end of the first quarter. That could hurt second-quarter profits but make room for fresh merchandise in the third quarter, when stores’ bottom-line burdens become greater.

So what does this mean for retailers and apparel firms?

Mark Larson, KPMG’s partner for its retail practice in the Americas, observed, “I think from a macroeconomic point of view, there are some pretty negative factors to contend with. In addition to rising unemployment, [consumer] credit delinquencies were on the rise in May. That may well be related to unemployment figures, which contributed to larger debt levels. Finally, there is still an overall uncertainty both economically and in world events. In addition to ongoing problems in the Middle East, now there’s the possibility that some of our troops will be sent to Liberia. The unknown clearly has a negative impact on spending.”

While Larson said the second half will benefit from both the federal tax cuts that are expected to reverberate throughout the economy and the positive impact from continued low interest rates, he cautioned that the issue of deflation will continue to be an interesting phenomenon.“Deflation is very real in apparel, and retailers are struggling with it and will continue to do so,” he said. “Even if they increase the number of units they are selling, that gain is more than offset by the rise in deflationary pressures. A concern is that if consumers pull back on spending, retailers will increase their promotions and prices will go down. The top line gets impacted, and then the question is how do retailers maintain their margins? The [vendors] are tapped out and probably can’t supply any more markdown money, so you have more operational cuts such as job losses.”

As reported, Sears, Roebuck & Co. last month began laying off staff at its headquarters in Hoffman Estates, Ill., and at several distribution centers. The operational review is expected to last through August and could result in as many as 1,500 jobs lost. A spokesman for Sears declined to comment on figures regarding the targeted reductions in headcount. One source with intimate knowledge of the initiative said that if retail sales don’t pick up, additional reductions in staff are likely. Also in headcount reduction mode, although at the stores rather than headquarters level, is May Department Stores Co.

Robin Lewis, a strategic advisor to retail and apparel companies, believes that disinflation, a bridge between inflation and deflation involving generally falling prices, will be an economic fact of life for some time to come. Unfortunately, disinflation can lead to deflation, which can be difficult to reverse course once it starts, as the apparel industry has seen.

To be sure, consumers love declining prices. However, they obviously don’t like it when they lose their jobs, an occasional by-product of disinflation. When prices decline, consumers and businesses cut back or postpone their purchases on the anticipation that prices will fall even further. But businesses then are forced to take additional cost savings maneuvers, such as paring back on staffing levels, to boost their bottom lines because they can’t grow their top lines, according to Lewis.

“What we have is a demand style stimulus, but people don’t realize that it is not going to reverse the disinflationary situation because there is just too much capacity. Productivity gains become negatives for the economy because all it does is churn out more stuff for less money. Until we kill off about 30 percent of the capacity in our industry, no amount of demand style stimulus will help this industry beat the deflationary spiral,” Lewis said.The critical period for determining the health of the economy will be in October, long after second-quarter earnings results and just as third-quarter reports start to trickle in, predicted Richard Hastings, chief credit economist at Bernard Sands.

Hastings, like Lewis, doesn’t expect the job market to improve anytime soon. He’s concerned that global production capacity continues to outpace consumption in the U.S. because consumer wealth is insufficient to “gobble up” that capacity.

“If we don’t see in October the right combination of numbers because growth failed to materialize, what will happen is that the dollar will weaken and the stock market will be ready to correct again. My bet is that global overcapacity may be so large that our domestic stimulus package will not address the dysfunctions caused by the massive global overcapacity,” Hastings said.

Like all shoppers, industry officials, often shopwatchers by nature, may have started to pull back, or at least to explore ways of boosting their personal value quotients. Even as industry has pulled back on capital expenditures, consumers have continued to spend rather than save, albeit not necessarily on apparel and accessories. But in the economic context of the post-9/11 world, there’s concern that priorities are changing and spending rates could decelerate.

Hastings and his family, for example, have pared back their discretionary purchases 5 to 10 percent. “While we’re not saving as much as we want to, we are generally becoming more concerned about wealth and savings than we were three years ago. I get a lot of enjoyment shopping in Costco, where I can increase the quantity and quality of consumables and get a nice shopping experience. It gives me a feeling of saving money and time.”

Even with mall counts down, hot products priced sharply continue to perform well. Jennifer Black, an apparel and retail analyst at Wells Fargo, noted stores and resources “that have the really hot product find that the items seem to sell out quickly, whether it’s a vertical operation or not. In one instance, Gap was selling a pair of flight pants without the zippers for $49. People were buying it like crazy, and when it was marked down to $29.99, it blew out of the stores within minutes. Apparel firms will do well if they continue to provide core products with the right kind of fashion twist.”Fitting into this mold is Nordstrom, and Black believes that its anniversary sale this year will generate strong results: “It will be one of the best in years because it is centered on everyday items at a great price for your money, featuring fashions with a twist.”

In addition to the offbeat, she’s excited about merchandise that’s more basic in nature but offers the promise of longevity, which should bode well for accessories and “retail nameplates such as Ann Taylor Loft and Old Navy, which I believe will clean up. The stores that are easier to shop at with the greatest price points will do well,” she added.

Even Black, a self-described shopaholic, has cut back on spending and will “probably cut back even more, but that’s because I have a teenager with four years of high school to go.”

However, her plans for personal economy were frustrated on a recent business trip to New York by the proverbial enemy of the budget and friend of the retailer — impulse buying. “I made two mistakes,” she said. “The Burberry and Stuart Weitzman shoe sales killed me. I had to take everything else back that I had purchased beforehand. Now, I didn’t really need the shoes, but I’m at the point where I’d rather buy something special than have something cheap.”

Emanuel Weintraub of Weintraub & Associates, an industry consultant, observed, “What we have here is the fear factor. We are really in unchartered waters for most Americans. Many people in their 40s, for example, either don’t remember or didn’t experience what the last extended stock market recession was like. Many are panicking and thinking they have to make up their stock losses through more savings. Even though the savings rate in America is ridiculously low, for businesses to grow, they can’t afford a shift toward a higher savings rate. That is the opposite of consumption, which is what we need to clear the decks of existing goods so we can make new ones.”

Stripping away the macroeconomic verbiage, most manufacturers and retailers find themselves in a heated battle to hold on to their share of a marketplace that really isn’t growing. Arthur Pereira, co-owner and chief financial officer of Kymsta Corp., a women’s sportswear manufacturer, observed, “Forget about growth, it really is a question of sustaining what you’ve got. It is becoming more difficult as you see your customer base deteriorating. We’re okay, but it’s because we continue to stay focused on being product driven.”For Pereira, it is the mid-market that is being hit the hardest. “For the high-class stuff, people in that bracket are not really affected because they have so much money that they are always looking for ways to spend it. Spending is their hobby. At the other end, the younger teenagers are spending more than before, but they also have greater access to money than before. It is the middle of America, Baby Boomers with kids between 30 and 35 years of age, that should be spending their money right now and many aren’t,” he said.

The cfo expects that things won’t change for the better until next year because there are still too many industries laying off workers and not enough to suggest that a turnaround is on the horizon.

“I’m expecting a tough summer, with some pickup in fall as people begin to replace certain commodities. The spending we need to turn this economy around isn’t happening. We’ve laid off 20 percent of our workers so far. If we don’t make our fourth-quarter numbers, we’ll have to make more adjustments,” he disclosed.

As reported, apparel and textile firms have been doing a lot of adjusting lately and, in June, shed 5,400 jobs from their collective payrolls, bringing the industries’ total employment down to 773,200.

While Pereira and his family have pulled back between 20 and 25 percent of their spending, cutting down on luxuries such as apparel purchases, he notes that much will depend on consumer perceptions about the strengths of the economy.

He observed, “Right now, even with the Iraq war over, we still feel uncertainty and fear. Our troops may be sent to Africa, and others are spread out all over the continents trying to affect our freedom. There’s a lot put into the war effort, but closer to home, economically, if there is no money in your pocket, how do you feel free?”

Gene Silverberg, executive vice president of Hilco Merchant Resources, said he’s actually “buying with a little euphoria” when it comes to his own shopping habits. Nearly two years after the devastating attacks of Sept. 11, he said that many have learned to live against the backdrop of “what-if scenarios. There’s still bad stuff out there, but also a reason for optimism. You return to living and continue with your life. It’s still slow, but people are buying more than they did a year ago.”Gil Harrison, chairman of investment bank Financo Inc., which specializes in the fashion industry, believes that deflation is a continuing concern throughout the economy, more so in the apparel and retail sector. Yet he also believes the second half may end up better than many are predicting right now.

“In January, I said it would be a tough first half because of the looming Iraq war, the weather and everything else. But now I think that back-to-school and fall will be much better than expected because of new product offerings from companies. Everyone is making a concerted effort to bring newness and freshness to their lines. Hopefully, it will encourage the consumer to spend more money.”

He expects his firm to be as busy as ever as the smaller firms look to be bought by bigger fish, as has been the case repeatedly just in the past month, as seen in VF Corp.’s planned purchase of Nautica, Nike’s pickup of Converse and Delta Apparel’s move on Soffe. “You’ll see more deals as consolidation continues, whether it is a $200 million firm needing to buy a $50 million firm for growth, a $1 billion firm buying a $300 million company, or even a $10 billion firm acquiring one that does $2 billion. The fact is that consolidation is part of the American business platform.”

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