Week of December 10, 2018
By Garrick Brown
Ball of Confusion
Among economists, forecasts for retail sales growth this holiday shopping season are all positive. Most analysts predict growth in the high 4% range, though some have forecast 6% or more. After last year’s strong showing, plenty of reasons support this theory: a longer holiday shopping season, more consistent winter weather, and – most importantly – accelerating wage growth and an unemployment rate that’s holding at a 49-year low, to name a few.
Too often in recent years, the story of retail has been one of dark clouds with silver linings. The wage growth story, however, is the reverse. Accelerating wages, a worker shortage, and tariffs mean costs, prices and inflation are all slowly ticking up, from the distribution chain to the storefront. This hasn’t yet reached a critical tipping point, nor should it keep shoppers at home this year; after all, inflation is still near the Fed target of 2%. Still, my personal forecast is that overall sales growth will likely fall in the low 5% range. This is great news for retailers, right? Well, more on that in a moment…
U.S. GDP hit 4.2% in the second quarter of 2018 and 3.5% in the third, but what goes up must come down. While most economists aren’t forecasting a recession in 2019, the National Association for Business Economics (NABE) predicts GDP will grow by 2.7% next year, down from this year’s estimated 2.9%. While these numbers represent an increase over the last few years, they still paint a picture of an economy at its peak…right now.
In the last few weeks, I’ve received numerous inquiries from clients and the media:
“Is a retail revival underway?”
“Are we looking at a recession in 2019 or 2020?”
“Is ‘the retail apocalypse’ over?”
“Are we about to see a bear market?”
I certainly don’t have all the answers, but it’s critical to point out a few things.
Chris Thornberg of Beacon Economics is one of my favorite economists. He called the first tech wreck about 18 months before it happened and predicted the housing meltdown in 2006. I was on a panel with him once where he told the audience – and I’m paraphrasing – “Wall Street performance is the hysterical pre-teen of economic indicators. The lows are usually too low; the highs are usually too high.”
Keeping in mind that stock performance is often more about expectations and certainty than actual performance, we are likely in for a bumpy ride. Wall Street is usually forward-looking, but if you want stability and clarity, there are reasons for concern. Rising interest rates almost always set off concerns from the investor class, even if their moves ensure we minimize boom/bust cycles and keep growth at sustainable levels long-term. Stock market volatility will almost certainly continue into the new year, especially as domestic political instability continues. But for now, economic performance is as solid as we’ve seen in nearly two decades. NABE predicts job growth will continue, with unemployment likely hitting 3.6%. And importantly, only 20% of the 53 economists surveyed by NABE saw a risk of recession by late 2019. (They predicted a 30% risk by late 2020, and a 50% risk by 2021 or later.)
That’s the good news. It won’t change the fact that we are likely to see Wall Street on a bit of a roller-coaster next year, but underlying economic fundamentals remain very strong for now.
So does this mean a retail revival is underway? That’s the wrong question to ask.
While retail is impacted by the cyclical ups and downs of the economy, the challenges of the last few years have been structural. That’s not to say that most retailers aren’t feeling a boost. The categories that were doing well when economic growth was still positive but subdued are still doing well. Those that weren’t are doing slightly better – but still face the same underlying structural issues.
The good news is that our current economic conditions buy time for retailers to rebrand, retrench and reconnect with consumers across multiple channels.
They buy time for mass market commodity apparel brands to pivot to either boost the experiences they offer bricks-and-mortar consumers or to focus on value – all while building omni-channel capabilities.
They buy time for chains whose value proposition was convenience of access (read: stores everywhere) to trim portfolios, let leases quietly expire, strategically close locations, get rid of dead weight and focus on locations that work.
They buy time for debt-addled chains to pay down their obligations, to work on their balance sheets, and to lessen their credit vulnerabilities.
And this is critical, because the good times won’t last forever. And when the next recession does come, whether that is in 2020 or 2030, no one is going to be asking about retail rebounds.
Time is precious. Use it wisely.
This post is commentary from the latest edition of our Cushman & Wakefield Retail Newsline, which you can subscribe to for free by e-mailing email@example.com.
Garrick Brown serves as Vice President, Retail Intelligence for Cushman & Wakefield throughout the Americas. He is one of the leading retail real estate analysts in the United States; speaking frequently at industry events and regularly quoted on retail matters by the Wall Street Journal, the CBS Evening News, NBC News, CNBC, National Public Radio, Women’s Wear Daily and dozens of Business Journals and other industry publications.