WASHINGTON — Steady income and personal spending growth combined with increases in home equity and low interest rates will contribute to a 3.1 percent increase in retail sales this year, according to the National Retail Federation.

This story first appeared in the February 11, 2016 issue of WWD. Subscribe Today.

The NRF forecast the growth in retail sales despite headwinds from economic turmoil in China, volatility in the U.S. financial markets and other challenges, such as bloated inventories and deflationary price pressures confronting retailers.

The 3.1 percent retail sales forecast is higher than the 10-year average of 2.7 percent, the NRF said. Non-stores sales are expected to grow between 6 and 9 percent in 2016.

“In terms of our underpinnings, I expect consumers and their balance sheet should provide ongoing strength to the U.S. economy,” said Jack Kleinhenz, chief economist at the NRF. “Last year the personal consumption expenditure [growth], when you take out inflation, was 3.1 percent. That was actually the fastest since the recovery began. The economy is being driven by the consumer. I think domestic demand is holding up.”

The economy should see a boost from several factors, including stronger wage growth, a rebound in auto sales and a boost in home building, in addition to increases in homeowner equity and low interest rates, he added.

“With job increases and equity in the home, that gives the ability to spend,” Kleinhenz noted. “I think the 2016 economy will hold up and support further growth, especially for retail this year.”

The first half is expected to be weaker than the second half of the year because momentum going into the first quarter is “limited,” Kleinhenz said.

In addition, inventories remain “elevated,” which Kleinhenz attributed to “spending challenges that retailers have seen” and a shift in spending toward services. He said the back-up in inventories has been building since the middle of last year as retailers try to find the right balance for consumers.

“What will that mean? We’ll largely continue, in my view, deflationary prices. It’s a very competitive market out there in retail. To that extent we will continue to see promotions and discounting that will get people out to buy some of these retail goods.”

Matthew Shay, president and chief executive officer at the NRF, said: “We feel very positive that the foundation for growth is there and we recognize that 3.1 percent is very reflective of the environment in which we are operating. We think that is a good, solid, healthy number and a very reasonable and achievable forecast for the year ahead.”

Shay said low gas prices and lower prices for goods are “creating a greater level of discretionary income for consumers.” But he acknowledged that much of the anticipated savings from low gas and heating prices last year did not translate into broad-based spending.

“The longer gas prices stay low, the more likely people will believe they will stay low and it is real,” Shay said. “They are going to feel more confident about spending those savings. The numbers suggest they are saving from lower gas prices and putting it into the economy, [while] a substantial portion is being saved. We think at some point there will be a tailwind because people will feel confident about spending it. Thus far, it just hasn’t shown up.”

Kleinhenz said savings rates were up 5.5 percent last month — the highest since 2012.

On the employment front, Kleinhenz forecast the economy will add about 190,000 jobs on a monthly average, which is a slower pace than 2015. While retailers boosted payrolls in January, overall job growth came in weaker than forecast. The entire retail segment added 58,000 jobs last month.

Asked about the impact of weak sales reported by several retailers in weather-related apparel and other items in December, Shay said the merchants were able to offset weakness in those categories by a pick-up in other areas, such as home furnishings.

“When you add in strong online [sales] and recognize that all of this is happening in an environment in which we know consumers are spending a great deal of money on automobiles, housing and home improvement, the combination of those things drove the offset,” Shay said.

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