WASHINGTON — Consumer spending and retail sales are expected to grow at a modest pace over the next six months, but economists cautioned that headwinds could create some risk to the economy, which has been gathering momentum, although at a slower pace than many had expected.
Retailers attending trade shows and regional marts across the country in the next six months can look for general stability in the economy, but some of the good news — falling gasoline prices and a relatively strong stock market — could be offset by weaknesses in income growth and exports, several economists and analysts said.
Doug Handler, chief U.S. economist at IHS Global Insight, said the recent upward revision in third-quarter gross domestic product growth to 3.9 percent from 3.5 percent “bodes well for future growth” in such areas as consumer spending and business investment.
But weak export growth and defense spending could put a drag on economic growth in the fourth quarter, with GDP growth decelerating to 2 to 2.5 percent, Handler said.
The forecasting firm cited a list of risks that “could impede growth in 2015,” including a “sharply higher dollar,” a slowdown in global growth, impending tighter U.S. monetary policy and continued weakness in household formation and labor-force growth.
“This forecast would be worse but for low oil prices creating a gasoline dividend enjoyed by consumers,” Handler said. “This dividend will also help make the holiday spending season a good one for retailers.”
Handler said a question remains about the extent to which the fourth-quarter weakness will spill over into 2015. IHS is forecasting real GDP growth to pick up steam to 2.7 percent in 2015, bolstered by improved consumer spending.
“Fortunately, the economy does seem to be gathering momentum now: Employment numbers have been steadily strong, the unemployment rate has come down and we are starting to see faster income growth,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “So, while the momentum didn’t happen as soon as we wanted this year, we do think it is growing now. I certainly think if gasoline prices remain low, which seems to be the consensus expectation at this point, that is going to provide a tailwind to holiday-related shopping.”
Moody’s Analytics expects a 2.5 percent annualized growth in real consumer spending in the fourth quarter and 3 to 4 percent annualized growth next year.
In addition, employment has also grown steadily, which gives a boost to consumer confidence, and Moody’s expects the economy to continue to add jobs in the 225,000- to 250,000-per-month range.
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University, cautioned that consumer spending has become bifurcated, with consumers willing to spend on big-ticket items such as cars, but less willing to spend on discretionary items such as clothes or shoes.
“Spending growth has been very weak in the last couple of years,” Dhawan said. “People want to buy cars, but they don’t want to buy other things because they don’t have enough income growth to support it.”
Dhawan said he expects growth for disposable income to increase 3 percent in the fourth quarter and about 4 percent in the first quarter of 2015. He said consumer spending will likely remain below 2.5 percent over the next two quarters.
“Consumers are economizing,” he said. “Oil and gas prices are coming down and that is supposed to give consumer spending a big boost according to conventional wisdom.…But they have been buying cars and that has become a problem of competition between cars and what is left over for spending on discretionary items like food, clothing and shoes.”
On the retail sales front, economists and analysts are projecting some growth, though pockets of weakness are expected to persist. Sales at apparel and accessories stores rose a seasonally adjusted 0.5 percent to $21.2 billion last month, while sales at department stores fell 0.3 percent to $13.7 billion. Sales at general merchandise stores, a category that includes discounters and department stores, remained flat at $55.7 billion.
Moody’s is projecting specialty store sales to be up 2.75 percent in the fourth quarter and nearly 5 percent in the first quarter of 2015. General merchandise stores are expected to grow 3 percent in the fourth quarter and more than 5 percent in the first quarter. Department store growth is expected to remain weak in the fourth quarter, falling 1.5 percent against the fourth quarter in 2013, according to Moody’s. But sales in the sector are expected to rebound in the first quarter with a 1 percent increase.
“We think the fundamentals are in place for stronger growth in retail sales and consumer spending this winter than we had last year,” Hoyt said. “The comparisons are made easier by the fact that we had severe weather last year and should also be noted the forecast is conditional on not having that type of disruptive weather this year.”
IHS Global Insight is forecasting an increase of 4.2 percent for holiday sales this year compared with last year. Holiday sales grew 3.1 percent in 2012 and 2013, the forecasting firm said. The holiday sales are not seasonally adjusted and exclude motor vehicles, gasoline and food services.
“Consumers are benefiting from lower gasoline prices, heavy discounting by retailers and relatively well-received employment reports,” said Chris G. Christopher, director of U.S. consumer economics at IHS.
Dhawan said since consumers are economizing, he does not expect a big spike in retail sales. He noted that retail sales growth has been running in the 4 percent range year-over-year and expects them to continue to expand at about that pace in the next couple of quarters.
He said weak income growth, which he projects to be between 3 and 4 percent in the next two quarters, will likely impact sales.
“There needs to be strong income growth or home price equity increases and those have been missing,” Dhawan said. “You might see the higher-end retail do well because the stock market is doing well and the lower end is likely to pick up because of the oil-price effect, but the middle will be affected the most by slow income growth.”
Keith Jelinek, senior managing director of FTI Consulting, said while it was encouraging to see positive growth in October for apparel specialty stores, the longer-term trend is more troubling in that sector.
“Men’s and women’s clothing specialty retailers have shown some improvement compared to last December, but their growth is still negative,” Jelinek said. “They’ve been able to hold onto their own and improve a bit, but total dollar volume growth in men’s and women’s apparel is still negative.”
In addition, positive growth by department stores has reversed in the past three months, he noted.
“We’ve seen over the last couple of weeks warnings in financial forecasts that show slippage in department stores, which have slipped into negative overall volume growth from August to October,” Jelinek said. “The concern for me is that the first half of the year, they were showing positive growth, but August through October has been poor.”
“The sector that is making headway with the largest recovery is discount stores,” he noted.
Jelinek said stores such as TJ Maxx and Ross in the segment have been taking the share of sales away from other sectors.
“What we are continuing to see in the channel is that Baby Boomers and Millennials have found there is value in there,” Jelinek said. “So discount stores are doing a nice job, while department stores are showing some slippage after a pretty strong half, and men’s and women’s clothing stores are trying to claw back, but are still in the negative in terms of overall growth.”