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Analysis: Retail Forecast 2015

BY CSA STAFF

By Phillip M. Perry

New York –Blue skies and cool breezes. That’s the economic forecast as the calendar turns for a new year. Retailers looking to bolster revenues and profits over the next 12 months should benefit from a gradual improvement in the ability and willingness of shoppers to spend.

“Stronger job growth, record low debt service burdens, record high stock values, and rebounding house prices are supporting consumer spending,” said Sophia Koropeckyj, managing director of industry economics at Moody’s Analytics, a research firm based in West Chester, Pa.

While such factors would normally be expected to provide a healthy tailwind to the economy, a number of issues will continue to put a drag on progress.

“Weak wage growth and a considerable amount of lingering slack in the labor market are preventing even stronger spending,” added Koropeckyj. She pointed to the high share of workers who would prefer to be employed full-time but who must settle for part time jobs.

GREATER SALES: The brighter 2015 outlook shows up in an anticipated improvement in the nation’s gross domestic product. In 2015, the GDP is expected to increase at a 3.5% rate, according to Moody’s. That’s a considerable improvement over the economy’s average growth mode of 2.5%.

“We are upbeat,” said Scott Hoyt, senior director of consumer economics for Moody’s. “It looks like the economy is starting to accelerate, and we expect that trend to be maintained.”

Retailers could be forgiven for harboring some doubts. After all, a year ago economists were predicting a much brighter 2014 than what was actually experienced. Indeed, that year’s 2.2% GDP growth rate was considerably below the 3.1% increased forecast by Moody’s. What happened?

“The year started on a weak note caused by the severe winter weather and excessive inventory accumulation,” explained Koropeckyj.

Those issues pulled down the results for the remainder of the year. Things weren’t help, she added, by an unexpected summer spike in interest rates.

SHOPPERS REBOUND: While consumers may harbor concerns about the economy, they are expected to open their wallets wider over the coming year.

“Core retail sales (excludes volatile revenues from auto sales and gas stations) should increase 6% in 2015,” said Hoyt. “That’s a significant increase from the 3.9% rate expected to be recorded when 2014 numbers are finally tallied.”

It also reflects a more robust retail environment than the period just prior to the 2008 financial crisis when the comparable figure was only 4.6%.

Why the big spike?

“Part of the reason is that 2014 has been stronger than the reported 3.9% retail growth rate suggests,” Hoyt. “The weak first quarter in 2014 artificially depressed the year’s results.”

In other words, consumers are returning to the stores and retailers are entering 2015 on a pretty good trajectory.

“With employment growth what it is, income growth should tick up,” added Hoyt.

What about consumer confidence?

“Consumer confidence has been sort of ‘inching up,’” said Hoyt. “It has not risen a lot but we are by most measures near post recession highs. As conditions continue to improve and as the unemployment rate comes down and we see growth in wage rates, confidence should be higher. That will facilitate the release of pent up demand and greater spending.”

Indeed, the jobs picture has been improving steadily. The unemployment rate had improved to a 5.9% level (as of press time) toward the end of 2014, and Moody’s expects it to decline to 5.7% by the end of 2015. By the end of 2016 the nation should experience what economists call “full employment,” which is an unemployment rate of 5.5%.

One of the most important drivers for the economy in 2015 will be an improved state of business confidence.

“Businesses are showing a new willingness to expand as opposed to three or five years ago when they were afraid banks might unexpectedly call in their loans,” said Walter Simson, principal of Chatham, N.J., -based Ventor Consulting. “Retailers, for their part, are fairly busy. They are hiring more people and increasing hours. I see a continuation of these trends.”

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