U.S. Economy Seen as Fundamentally OK.

The economy is expected to grow modestly in the first half of next year, buoyed by income and employment growth that will provide some stability for businesses and act as a counterweight to weak sales growth and depressed retail prices.

This story first appeared in the November 30, 2016 issue of WWD. Subscribe Today.

Economists and retail analysts pointed to strong underlying fundamentals that continue to serve as key drivers behind economic growth that should bode well for the apparel sector.

Some experts caution about potential headwinds such as a weak business investment environment as indications that the economy could show signs of vulnerability.

All anticipate that the Federal Reserve will raise the interest rate at its meeting in December, which could have an impact on consumer spending in the first half.

Most economists do not expect a Donald Trump presidency to hurt economic growth in the short term, although some of his policies could increase the national debt, particularly if significant tax cuts and spending measures are enacted.

If Trump follows through on threats to impose tariffs on imports from China, Mexico or other countries, the economy would take a bigger hit, some economists warned.

IHS Global Insight is forecasting a growth rate in gross domestic product of 1.5 percent on an annual basis in 2016 and expects GDP to rise about 2.2 percent next year, due to more “consistent growth,” said Chris Christopher Jr., director of consumer economics at IHS Global Insight.

“Things are looking a little brighter with a clean resolution to the presidential election. In addition, it seems the markets are rather bullish on Trump,” Christopher said.

He said the impact of a Fed rate hike on consumer spending will likely be marginal.

“Overall it’s not the best thing, but it will not kill growth,” Christopher said.

Frank Badillo, director of research at MacroSavvy LLC, a market research and consulting firm, said he is not as optimistic about the start of next year because weakness in areas such as prices and business investment could have an impact.

“Consumers are facing price pressure in health care, education and other service type categories, as well as prescription drugs, which are competing for their dollars,” Badillo said. “The job market, while it appears to be growing at a decent pace, has some underlying weakness, as well, and it is quite mixed as part of the country is being hit hard by cutbacks in energy jobs.”

The economy added 181,000 jobs on average on a monthly basis in 2016, while the unemployment rate remained flat at 4.9 percent through October, according to Moody’s Analytics. In the past two years, the unemployment rate has fallen to 4.9 percent from 5.7 percent in January 2015.

“Getting into next year, things will slowly improve,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “Number one: Improved wages should support demand. It is going to happen slowly, but demand should grow at a somewhat faster pace.”

Average hourly earnings rose 2.8 percent in October, the largest increase since mid-2009, according to the government’s most recent data.

“On a macro basis, the single biggest driver this year [behind] retail sales is growth in real disposable personal income…and we anticipate that will continue into next year,” said Craig Johnson, president of Customer Growth Partners. “It has risen over the last year or two in the neighborhood of 3 percent and that is decent income growth.”

In addition, the personal savings rate has started to decline somewhat, moving from 5.7 percent to about 4 percent, which he said means people are “beginning to tap into their ability to borrow and spend.”

“Apart from personal income growth, the American balance sheet is in better shape than it has been in almost forever,” he said. As a result, retail sales should reap some of the benefit.

Retail sales, which were up 4.3 percent in October year-over-year, are expected to grow moderately in the first half on the brick-and-mortar side and at a stronger clip on the e-commerce side.

Holiday retail sales forecasts this year ranged from 3.5 to 4.1 percent, which is expected to provide impetus heading into next year.

Moody’s is forecasting a 2 percent increase in specialty store sales in the first quarter next year compared with a year earlier and a 3.5 percent sales gain in the second quarter year-over-year.

“Some of that is general improvement in the environment with income growth picking up,” Hoyt said.

He noted that the second-quarter comparison should be elevated because the quarter was “particularly weak” this year.

Department store-sales are expected to be in negative territory at a 3 percent decline in the first quarter and a 2 percent decline in the second quarter.

“They are suffering,” Hoyt said. “Apparel sales are weakening as people move online. They also have physical stores closing, which undermines sales at brick-and-mortar stores and show up as a negative in the data.”

According to IHS, specialty store sales will rise 1.3 percent in the first quarter, but slow down in the second quarter to 0.5 percent.

Women’s clothing store sales on a nominal basis are expected to grow 1.7 percent in the first quarter and 1.2 percent in the second quarter, while men’s clothing store sales should rise 1.2 percent in the first quarter and just 0.2 percent in the second quarter.

“A lot of the slowdown [from the first to second quarter] is due to the macro U.S. model, which we expect to start seeing a slowdown in as inflation starts to pick up and employment growth slows,” he said.

The one area of strong growth will be online sales, which have been growing at a double-digit rate.

“When the year started, it was growing at 16 percent and it was some of the strongest growth we have seen in online sales,” Badillo added. “That will be a tough pace to keep up with. Even if it slows to 14 or 13 percent, it will still be very strong growth.”

Retail prices, which have been caught in a long-term deflationary cycle, are expected to remain weak in the first half.

While Hoyt said he expects pricing pressure to “slowly abate” next year, Christopher sees more deflation.

“Clothing and footwear prices have been getting hammered,” Christopher said. “They have been in basically negative territory since the third quarter of 2014.”

IHS expects those combined prices to fall 0.3 percent this year compared with a year earlier, followed by a decline of 0.3 percent in the first quarter and a 0.5 percent decline in the second quarter.

“They have been on a downward trajectory all the way and it will be a few years out before they enter positive territory,” Christopher added.