WATCHING THE PRICE PENDULUM SWING

Byline: Scott Malone

NEW YORK — When the Labor Department last week released figures showing that the average selling price of apparel dropped again in 2000, it left some economists wondering if a bottom had been hit.
With much of the price decreases over the past couple of years resulting from the fire-sale prices retailers managed to secure on imported goods in the wake of the Asian financial crisis of the late Nineties, they reasoned that the stabilization of currencies in that region may well mean that the bargains will be a little harder to find. While they didn’t expect sharp increases in apparel selling prices to result, those economists suggested that prices wouldn’t continue on the downward path of much of the past decade.
However, there’s no consensus on the issue. Other economists argue that with consumer spending starting to fall off, prices will continue to fall as retailers get even more aggressive in marking down goods to lure consumers into the stores. If anything, those observers argue, the industry should expect further price erosion.
Diane Kutyla, economist at Deloitte & Touche, suggested that the 1.8 percent drop in the 2000 Consumer Price Index for apparel marked an end of apparel price deflation.
“Over the last couple of years, a lot of apparel manufacturers have been able to get a lot of great deals coming out of the Near East and Asia+ when they were having their deflation there,” she said. “That has ended, so the benefits to consumers from these lower prices are not going to be there anymore.”
The 1.8 percent drop in the apparel CPI was the sharpest decline reported in years, though the general movement has been down. Since 1995, apparel was down three out of five years. That year, it eked out a 0.1 percent increase, and in 1997 it was up 1 percent.
Kutyla noted that in addition to firming Asian currencies, the rising cost of petroleum products, which has driven up everything from the cost of synthetic fibers to the energy to run mills and sewing plants, will prevent apparel prices from falling further. “I don’t think it will be dramatic, but I think the days of strong declines are ending,” she said.
Stephan Thurman, senior economist at the U.S. Chamber of Commerce, agreed that a bottoming out of apparel prices is likely, particularly if the dollar starts to come down from its highs of last year.
“A lot of the pricing power that the industry has lacked comes from import competition,” he said. “We see the dollar doing some correcting this year, which should help domestic manufacturers.”
However, Thurman also noted that consumer demand is starting to fall off, which would tend to keep prices down. It’s not clear which influence on pricing would be stronger, he said. “Real demand will be off, but pricing power will be back,” he said. “I don’t know where all that nets out.”
Other economists give a lot more weight to the falloff in consumer spending, contending that a slowing economy will continue to force prices down.
“You don’t get price traction when the consumer is cutting back,” said Carl Steidtmann, chief retail economist at PricewaterhouseCoopers, who believes the U.S. is in a recession. “In fact, I think the opposite is going to happen. One of the driving factors is the downshifting of apparel purchasing into discount channels, particularly Wal-Mart and Target. That process is going to slow the economy.”
Steidtmann dismissed the idea that rising raw material prices and energy costs would act to boost apparel prices.
“It is a small percentage of the total cost,” he contended.
Some economists suggested that the macroeconomic trends of the apparel industry, which have been driving prices down, will continue to allow retailers to keep them deflated.
“There are still cost reductions that can be brought out as they go more and more to their Asian sources,” said Jim Glassman, senior U.S. economist at J.P. Morgan & Co. “It almost seems like it may actually get worse before it gets better.”
One factor that is likely to keep prices down is the growing importance of China on the world trade scene, he said. He said that the U.S. trade deficit with China now exceeds the deficit with Japan.
“They’ve got decades to grow,” he said. “They’ve got to grow 7 to 8 percent [a year] to create enough jobs for people who are coming in off the farms.”While economists said that it’s likely that apparel price deflation will stop at some point — and that the stabilization of Asian currencies may provide some stability — most weren’t holding their breath.
Ken Goldstein, economist at the Conference Board, said he didn’t expect the improvement in Asian currencies to have an immediate effect on U.S. clothing prices.
“It could well be the feather that tips the scales,” he said. “But one needs a healthy dose of skepticism about what will tip the scales and when.”

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