Optimism Abounds at NRF Economic Panel
Riding the wave of the best holiday shopping season in nearly a decade, retailers are optimistic about the prospects for a strong 2018. And economists share their enthusiasm.
In a panel discussion yesterday at the National Retail Federation’s (NRF) Big Show in New York City, Jack Kleinhenz, chief economist for the NRF; Gad Levanon, chief economist, North America, The Conference Board; and Brian Nagel, managing director and senior analyst, hardlines retail and e-commerce, Oppenheimer & Co. Equity Research, looked back at the 2017 holiday shopping season, analyzed the top economic trends in retail and consumer behavior, and offered their forecasts for the year ahead.
‘A Vibrant Holiday Season’
This is how Kleinhenz described the recently passed holiday shopping season, with the NRF reporting holiday sales (November and December) increased 5.5 percent over the same period in 2016, bolstered by an 11.5 percent year-over-year growth in e-commerce sales.
Kleinhenz described a confluence of positive factors that helped drive holiday spending, including job growth, rising consumer confidence, and a healthy stock market. But the signs were there prior to the fourth quarter that the economy was in an upswing. The third quarter GDP came in very strong, and the economy was much stronger moving into the holiday season, noted Kleinhenz. “New jobs equals new income equals spending,” said Kleinhenz. “This came at a very good time, and retailers took advantage of the situation.”
Furthermore, the strong holiday season in the U.S. is reflective a strengthening global economy, said Levanon.
“Right now, investors are relieved and, frankly, giddy, with retailers’ holiday performances,” Nagel said. He also pointed out that the good fortune wasn’t limited to online retailers, as traditional brick-and-mortars held their own and did quite well. “Amazon isn’t going to put all retailers out of business just yet,” Nagel said jokingly.
What’s ‘In-Store’ for 2018
There are some positive indicators that 2018 could see a continuation of the momentum retailers saw in the second half of last year. First is that consumers are starting to borrow more than they have in recent years — i.e., they’re increasingly using credit cards. Next is that consumers figure to benefit — at least in the short term — from the recently passed tax reform legislation.
Disposable income in 2018 is forecast to rise 2 percent, noted Levanon, citing a Brookings Institute report. In addition, a rapid rise in home prices is contributing to a wealth effect, Levanon added.
“2018 will be a strong consumption year for the U.S. economy,” predicted Levanon.
Another factor that’s helping the retail industry is the cold weather that’s gripping most of the country. After two mild winters in a row, the cold weather has been a positive for retail sales, said Nagel.
Warning Signs on the Horizon
It wasn’t all good news coming from the panel. There are some things that retailers need to have on their radars as they plan for the future, chief among them a tightening labor market.
“The laws of supply and demand aren't going to disappear,” Levanon said. “When you have labor tightness, wages will typically accelerate. Labor costs could grow faster than revenues. Furthermore, massive retirement of baby boomers will be a downward pressure on corporate profits.”
In addition to labor tightness, the long-term impacts of tax reform have some economists worried about a growing deficit.
Investing in Your Future
Corporate tax reform has gotten retailers excited, Nagel said, as domestic retail is one of the highest taxed verticals in the U.S. economy. As such, with their tax rates being cut, many retailers will likely see themselves with a cash windfall in 2018. What they’re going to do with that money remains to be seen, but signs are pointing to reinvestments in employees and technology.
“It seems to me that they [retailers] want to invest the money rather than just offer buybacks and dividends,” said Nagel. “Wal-Mart is a prime example of that.
“The effective use of technology when evaluating Retailer A vs. Retailer B for investment opportunity is what Wall Street is looking at,” Nagel added. I believe the growth of Amazon is making traditional retailers much better companies. Home Depot is the example I cite. It has looked for ways to future-proof its business, further strengthening their existing competitive advantages.”
Kleinhenz echoed Nagel’s sentiments, noting that it will be important for retailers to invest tax savings into employees and employee training, as well as filling gaps in technology that exist within their organizations.
Related story: QVC is Using Technology to Overcome Business Challenges
Joe Keenan is the executive editor of Total Retail. Joe has more than 10 years experience covering the retail industry, and enjoys profiling innovative companies and people in the space.