Retailers will enjoy brisk economic tailwinds in 2019. A strong labor market will inspire liberal spending, while a robust business climate fuels higher corporate profits. At the same time, some economists are seeing early signs of an inevitable correction.
“The coming 12 months should be a good year for retailers,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “Core retail sales (which exclude the volatile auto and gasoline segments) are expected to grow a healthy 4.7 percent in 2019.”
Happy shoppers are driving the market. “Consumers seem to be euphoric right now,” Hoyt says. “The fiscal stimulus in the form of tax cuts, as well as the tight job market, mean there are very few negatives when it comes to consumer fundamentals.”
The healthy consumer sentiment reflects an overall economy that is still growing. "The business cycle has entered its boom phase,” says Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics. Gross national product is expected to grow at a 2.7 percent clip in 2019.
Despite the generally sunny outlook, the GNP forecast represents a modest deceleration from the 3 percent growth anticipated when final numbers are tallied for 2018. And the 2019 retail sales growth estimate is also down from the 5 percent surge of 2018.
“There are several reasons for slower growth in 2019,” Hoyt says. “The largest is that deficit-financed tax cuts at the start of 2018 lifted growth. No such support, in terms of an additional increase in after-tax income, is expected in 2019. Job growth will also be slower because there are fewer available workers.” Finally, Hoyt notes that interest rates will likely be higher, a factor that can have a softening effect.
SHELF PRICES RISE
Retailers, for their part, are largely relieved of a problem prevalent in the marketplace a year back: the inability to raise shelf prices. “Lack of pricing power is still a concern, but is not as big of an issue now,” Hoyt says. “Retail prices actually began to rise a bit in the first half of 2018, for the first time in three years. That’s most likely because of the tight labor market and the resulting toleration for price increases by shoppers.”
Indeed, pricing increases are expected to be the key to success in the months ahead. “Growth will be more price-driven in 2019 than in 2018,” Hoyt adds. The need to increase revenues largely by boosting prices rather than moving more merchandise accelerates a trend that began in 2018.
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Favorable as it seems, the bright revenue picture is not shared by all retail players. “The renaissance of retail has been uneven,” says Bob Phibbs, a retail consultant based in Coxsackie, N.Y. “2018 was a mixed bag, with legacy players having a harder fourth quarter and lowering their outlook toward the end of the year.”
Retailers who came out on top, says Phibbs, invested early in a multichannel sales approach, a strategy more and more pool and spa retailers are adopting.
“The successful retailers went after shoppers in every buying pattern, whether that meant selling in store, online or letting them order online and pick up in store, or even delivering to their homes,” he says. “For the ones who started looking at digital sales 10 years ago, 2018 was the year their approach finally started to bear fruit.” The same secret sauce will work in 2019, he says. (See sidebar at the bottom for additional info.)
The nation’s shoppers are opening their wallets wider in response to a happier jobs picture, one that should only brighten in the months ahead. Moody’s expects unemployment to drop to 3.4 percent by the end of 2019, down from the 3.7 percent at the end of 2018. (Moody’s Analytics first declared that the economy had reached a state of what is often called “full employment” with its 4.1 percent showing in 2017.)
“The fundamentals of the labor market look good at least into the midyear of 2019 and probably longer,” Hoyt says. “The nation is adding jobs faster than the growth in the wage-earning generation, so we expect a further tightening of the labor market in 2019.”
More jobs mean more wages, so shoppers will have more cash to spend. Average hourly earnings are expected to grow by 3.2 percent in 2019, up from the 2.8 percent of 2018 and the 2.6 percent of the previous year, according to Moody’s.
“Rising wages are very good for the economy,” says John Manzella, a Buffalo, N.Y.-based consultant on economics and global business. “The more disposable money consumers have, the more they spend. And consumer spending represents 70 percent of the nation’s economy.”
The fattening of paychecks seems to be a more important consideration for people than any negative economic news. “Consumers are not worried about the effects of a possible trade war, or gridlock in Washington, or the rise in gasoline prices that has taken place over the past year,” Hoyt says.
The housing market, a powerful driver of consumer sentiment and economic growth, should deliver more good news in 2019. Housing starts are expected to rise by 19.4 percent in 2019, a substantial increase over the 7 percent expected when 2018 is tallied. Median home prices should rise by 2.7 percent, slower than the 4.8 percent of 2018.
The challenge for home builders is finding enough workers. “Residential construction as a whole remains bedeviled by a shortage of capacity,” Koropeckyj says. “The unemployment rate for experienced construction workers is at a record low of less than 5 percent, suggesting that construction labor for the U.S. as a whole is critically short.” Shortages in workers with certain skills, such as pool and spa service technicians, electricians and steel-erection specialists, are particularly acute.
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Indeed, the labor shortage has contributed to a leveling out of construction starts for new and existing home sales, and multifamily housing, through the first half of 2018. “The construction industry has been operating at full capacity and is still struggling to reduce its backlog of projects,” says Koropeckyj. The coming 12 months should experience a rebound as new multifamily building ebbs, releasing workers for the less-labor-intensive single-family category.
All of the above factors have business owners sharing consumers’ sense of optimism. Indeed, corporate profits are expected to rise by 3.7 percent in 2019, according to Moody’s.
“We expect corporate profits to benefit from the tax reform mainly through the lower top tax rate and the new equipment accelerated expensing provision,” Koropeckyj says. “Also a positive to corporate profits is the rollback of Dodd-Frank Act provisions, which had increased costs for businesses.” The anticipated level of business profits actually represents a deceleration from the 6.9 percent increase expected when 2018 numbers are tallied. This is largely due to an anticipated rise in labor costs and higher interest rates.
Despite all the good news, troubles do loom on the horizon. “The number one issue for retailers is the possibility of a trade war,” Hoyt says. “That would be a lose-lose situation, adding cost to imported merchandise and undermining job growth to some degree, therefore reducing spendable household income.” (However, Moody’s is not building much of a trade war into its 2019 forecast.)
“The wild cards are tariffs,” says Phibbs. “If they really take place, I think every retailer is worried. An average bike, for example, might go up $200 in price. Everyone is ‘wait and see.’ It’s the monkey wrench that everyone is trying to figure out how to deal with. It will affect margins and ultimately consumers will pay for it.”
Here are some other potential problems peeking over the horizon, for businesses of all stripes:
- Rising interest rates. Higher costs of money pose a challenge for everyone, especially if the Federal Reserve raises rates too quickly. “Rising interest rates may not cause much impact in the short term,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pa.-based regional employers’ group with more than 370 member companies. “But later in 2019 the higher cost of money may start to constrict the availability of capital.”
- Wage hikes. Here’s the negative flip side of low unemployment. “With the economy chugging along as it is and unemployment lower, retailers may need to raise wages to attract enough people,” Hoyt says. That can crimp profits.
- A “hard Brexit.” If the U.K. fails to land a favorable deal with the European Union, it could cause problems to the world economy. “We expect a Brexit deal to be reached at the last minute,” Hoyt says. “If it is not, it would be a negative for the global economy and U.S. consumers as supply chains and movement of workers would be disrupted.”
- Health care costs. “On the cost side, health care is still a concern,” Palisin says. “Some 70 percent of our members report an increase in medical costs over the past year. Again, there is a lot of unpredictability in that sector. Will the Affordable Care Act continue? Be replaced? And will that result in higher costs? Employers don’t know where all this is going.”
BUSINESS CYCLE AGES
To look a bit further down the track, there are signs the fast-moving economic carriage may be nearing the top of the roller coaster. “The nation is experiencing robust economic growth, tightening labor and product markets, intensifying wage and price pressures, monetary tightening and higher interest rates,” Koropeckyj says. “These characterize a business cycle nearing its end, just prior to a recession.”
When might that occur? “We prefer not to forecast recessions, which are often caused by shocks that cannot be predicted,” Koropeckyj says. “However, our forecast for 2020 includes a set of conditions that are consistent with a recession. While we do not expect the textbook definition — two quarters of GDP decline — to occur, real GDP growth is expected to slow to a crawl.” Other relevant predictions include a too-rapid increase in unemployment, the cessation of job growth, flat industrial production and a deceleration of personal income growth.
To help draw a bead on the recession’s timing — or maybe just to bring into sharper focus the changing operating environment — Hoyt suggests watching a number of important indicators in the early months of 2019.
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“I would keep a close eye on the political environment,” he says. “What is going on with tariffs, and is there a risk of a trade war? Beyond that, I would watch for indications about the anticipated pace of interest rate hikes from the Federal Reserve. At some point those will start to bite and put a damper on growth. That will probably be an issue for later in 2019, but the faster rates go up the sooner the economy might be affected.”
For retailers, the employment picture may be the most important factor of all. “Watch for anything related to the labor market,” Hoyt adds. “How much are wages accelerating, and is the increase fast enough to offset any deceleration of employment growth?”
For businesses of all kinds, the prudent course seems to involve capitalizing on good times while setting up Plan B for the inevitable correction. “Businesses are optimistic about 2019, but we are all aware that recessions are cyclical,” Manzella says. “And there is no doubt that the next recession is on its way. The only question is when.
Retail Success Map For 2019
Deliver merchandise the way shoppers want it: That’s the formula for healthy retailing in 2019. “Retailers have to use all channels,” says Bob Phibbs, a retail consultant based in Coxsackie, N.Y. Some shoppers want to shop the brick-and-mortar store, others want to buy online and then pick up in the store or have the goods delivered.
The old days of relying on discounts to spark sales are over. “Discounts worked in the ’60s but not in 2019,” he says. “There will always be someone cheaper online.”
Creating multiple pathways to sales requires some investment in technical infrastructure. “The fact that the consumer has never had more choice makes it harder to decide where to put your money, ”Phibbs says. And that’s not the only expense: “Retailers are still wrestling with the rise of free shipping and free returns for online sales. Often people will buy more to qualify for free shipping, then returns some of what they ordered. That eats into margins.”
Phibbs also emphasizes the need for — and costs of — finding quality employees for the sales floor. “It’s hard to find employees. We have never seen this kind of a labor market before. Some retailers are offering things such as cash incentives and vacations — even for part-time employees.
“Others are trying to get the teacher who gets off work at 3 p.m. for evening work, or the mom whose kids get home at 3 p.m. for day work. The challenge is how do you get them trained well enough so they are not just bodies? One solution is online training programs, which people can take at home.”
Which boils down to the No. 1 tip: “Train your employees so merchandise goes out at full price, and people find value coming to your store. That’s the recipe for success in 2019.”