For The First Time In Three Years, Retail Can Honestly (But Cautiously) Forecast Growth

Author(s): Scott L. Grossfeld

Source: CCN Retail Perspectives

February 2011

In analyzing the retail market for 2011, the words of that famous Buffalo Springfield song come to mind: “[t]here’s somethin’ happenin’ here; what it is ain’t exactly clear.”

Based on news reports and commentaries following the second quarter, holiday season and end of 2010, it appears that the retail industry is in a significant recovery mode, retail and consumer spending have increased, consumer confidence has grown and retail is expanding. However, it is unclear how sustainable and robust this recovery will be due to such nagging hangers-on as continuing high unemployment, the growing government deficit and a daily-changing world economy. Nonetheless, many commentators believe that a recovery commenced in this country at the end of 2010 and will continue into 2011 and beyond.

As compared to the last two years (2009 and 2010) where the projections heading into those years were generally bleak, 2011 seems to be getting off to a positive start and appears to be heading for a promising future. According to the U.S. Commerce Department, the economy grew in terms of Gross Domestic Product at a solid 3.2% annual rate in the final three months of 2010, after expanding at a 2.6% pace in the third quarter of 2010. Overall, in 2010 the economy grew at 2.9% -- this was the largest gain since 2005.

As a reference point, in 2009, the economy contracted by 2.6%. The type of material growth in GDP experienced in 2010 (especially towards the end of 2010) will likely give the economy significant momentum heading into the new year according to many economists. Growth should build and continue. In fact, recent statistics are already indicating that for the first quarter of 2011 retail growth is trending up significantly. Many economists and commentators are pointing to this increasing growth in GDP as evidence of sustainable expansion. However, many also caution that it is not evidence of a sustainable economic recovery, as it is not yet offering the prospect of a rapid decline in the unemployment rate. If the labor market does not grow with it (by reducing unemployment), this could limit the growth potential. Therefore, although the increase in GDP is a major positive sign for the retail industry, the fact that unemployment is not being reduced as quickly as GDP is increasing seems to be tempering the prospects of a more positive forecast from this particular development.

Another reason for dramatic growth in the U.S. economy in the fourth quarter of 2010 was the biggest gain in consumer spending in four years -- consumer spending grew at a rate of 4.4%. Consumer spending accounts for approximately 70% of the economy. In addition, it appears that consumers are growing more confident. According to a recent Thomson Reuters/University of Michigan Consumer Sentiment Index, the Index rose to 74.2 from 72.7 earlier this month. Although analysts do not necessarily expect consumer spending to continue rising at such a brisk pace, they do expect it to remain fairly strong into the foreseeable future.

According to a recent MasterCard Advisors’ Spending Pulse report, U.S. retailers’ 2010 holiday sales jumped 5.5%, for the best performance in this category in five years. In addition, sales at U.S. retailers rose by 6.5% overall in 2010, capping the biggest one year gain in more than a decade. Based on all of the foregoing, it is not hard to understand why Michael Niemira, Chief Economist at the International Council of Shopping Centers, recently stated “[w]e have recovered from the recession. … I’m also optimistic that the underlying storyline for consumer fundamentals will improve this year. That means stronger job growth, more income growth.” Other strong economic data include major chain stores posting an annual 3.1% year-over-year sales increase according to a Thomson Reuters’ tally of 28 select retailers.

Based on all the foregoing, including the added benefit of the Federal Government’s extension last month of the Bush-era tax cuts, renewal of emergency jobless benefits for long-term unemployed and cuts to payroll taxes of two percentage points, various retail economists were compelled to raise their retail forecasts for the forthcoming quarter and for the remainder of 2011.

In fact, Customer Growth Partners just recently issued its annual retail sales forecast, and they are expecting retail sales this year to outpace historical averages. Customer Growth Partners’ forecast calls for retail sales to rise 5.1% in 2011. This is the strongest growth in retail sales in four years.

The International Council of Shopping Centers also expects 2011 to be a positive year for the retail industry. They forecast same-store sales to be up between 3% and 3.5% in 2011.

These forecasts are being bolstered by the recent January, 2011 retail sales figures, which seem to indicate that consumers were not “spent out” after the holiday season. According to an International Council of Shopping Centers’ index of 32 key stores, the month of January, 2011 saw a 4.8% increase in retail sales, as compared to the 1.5 to 2% that was expected for the same period. This bodes well for the first quarter of 2011 and the coming year.

Some major hesitancies to those projecting positive forecasts in retail are the current unemployment situation (and the likelihood of continued high unemployment) and the decline in housing values (and continued failure to restart the housing construction industry). However, the recently passed government tax package and talk of mass hiring's by the likes of Ford Motor Co., and other major companies that have performed well in the fourth quarter of 2010, as well as recent progress in the political world with exporting prospects (including to China) are mitigating against those fears.

Notwithstanding, even with the continued unemployment and housing industry problems, economists are projecting growth for retail in 2011 (as stated above). To the extent high unemployment rates begin to reduce quicker than otherwise expected (as a result of strong exports, tax incentives or otherwise), this could lead to greater consumer spending, more growth and a more determined, secure and sustainable retail recovery, at an even faster pace than currently projected.

The last three years in retail have been the worst in recent memory. According to many, 2011 looks to be at least the start of a breath of fresh air. The end of 2010 appears to have started a process that all of us in the retail industry hope will lead us back to better times.

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