NEW YORK — Retail and apparel firms should keep close tabs on the hiring front if they want to gauge the future of consumer spending patterns, according to several industry experts.
While hiring has picked up, more job growth is needed to maintain consumer spending levels. And with 2004 a presidential election year, one can expect the jobs front to be a major issue for the two candidates, the expected Democratic nominee John Kerry and incumbent Republican George Bush.
The outcome of the election isn’t expected to have a direct effect on the consumer, although there may be some indirect repercussions. Any impact will likely be felt by businesses, due to possible changes in economic policy, such as a repeal of certain tax benefits. However, there might be a ripple effect that could hamper consumer spending if companies compensate for higher costs by slashing jobs, analysts and experts said.
Elaine Hughes, founder of the executive search firm E.A. Hughes & Co., which specializes in the apparel and retail industries, said, “From what I’ve been hearing, if Sen. Kerry gets elected president, Wall Street is expected to get hit. That will definitely affect the stock prices of publicly traded retail and apparel firms.”
Hughes said that in the past “the first thing that I’ve seen companies do when their stock prices drop is to cut staff.”
Hughes said Wall Street likes that because it creates less overhead. “The problem is that the jobs lost affect the lower echelon, not the senior levels,” she explained. “People forget that it’s the rank and file that is needed to execute the [corporate] strategy.”
Of course, fewer jobs means a reduction in income and, consequently, less money in consumers’ pockets. Sometimes, just the perception of possible job losses can do just as much, if not more, damage.
Richard Kestenbaum, an investment banker and chairman of Kestenbaum Associates, foresees continued economic growth for the second half of 2004. Even if there’s a slowdown, he doesn’t expect the apparel industry to be hit as hard as in the past, mostly because the sector has been in a recession for 10 years and firms have either consolidated or worked on shoring up their operations. He also doesn’t expect gradual increases in interest rates to hurt consumer spending, even for those who happen to hold adjustable rate mortgages, or ARMs, which could rise.
“While some consumers can expect a [higher payment] with a rise in interest rates, most ARMs have caps on the increases. The actual cost to the consumer is therefore relatively low. What is not low is the impact of rising rates on consumer psychology. If job growth declines, the psychological impact will be that jobs are in jeopardy. The key is to watch job figures to gauge consumer psychology and what it means for their future willingness to spend,” the banker said.
In 2003, the average weekly number of claims for unemployment benefits was 402,000. So far this year the average is 347,000. Yet the U.S. added only 112,000 jobs in June, representing less than half of what was created in May. And U.S. employers said in June they will cut 64,343 jobs, according to data compiled by search and placement firm Challenger, Gray & Christmas Inc. The number of cuts reflects a 7.8 percent increase from May 2003.
Already there are signs consumers may be moderating their free-spending habits. Wal-Mart, for example, reported earlier this month that June same-store sales results came in at the low end of revised guidance downward. Gas prices have fluctuated, but in many parts of the country prices for dairy products and certain meats such as chicken have started rising.
The Summer 2004 Retail Sales Outlook from the National Retail Federation noted some countervailing trends for the consumer. In addition to higher energy costs, benefits such as lower withholding rates in paychecks and midyear child tax credits will not be repeated this year. “Therefore, we are counting on the improvement in the labor markets and increase in wages and salaries to provide the financial wherewithal for consumers to keep on spending. If employment growth stumbles, we could see consumer spending soften,” the report said.
Anne Maxfield, president of Project Solvers Inc., a New York staffing agency targeting the apparel industry, observed that so far fashion firms are still in hiring mode.
“We’ve got great jobs for everything from design to production. The problem is there is an insufficient pool of qualified candidates to choose from,” she said.
For Richard Hastings, retail analyst at Bernard Sands, “What we have is a wild card economy that remains in place. You cannot plan because of wild cards that exist, such as the oil supply.” The analyst explained that a glitch such as a terrorist hit on the Saudi Arabian oil wells, for example, could be a “big problem.”