Case Western Reserve University
City Club of Cleveland: Sue Helper, a professor of economics and Jack Kleinhenz, an adjunct professor—both at the Weatherhead School of Management—weighed in on the immediate and long-term negative economic consequences of multi-pronged efforts to decelerate the spread of COVID-19.
How’s the Economy Doing?
Better than you might expect, and worse than you might have hoped, according to the National Association of Business Economics.
According to the organization’s latest survey of 53 professional economic forecasters, the consensus is that the economy will continue to grow at a 2.6% pace in 2019, down from last year’s 2.8% rate, and will slow to 2.1% in 2020. However, as the outlook for this year still seems good, a majority think a recession is possible before the next presidential inauguration.
Personal spending remains a bright spot. “The consumer continues to be the driver in the U.S. economy,” said Jack Kleinhenz, chief economist for the National Retail Federation and one of the analysts of the report. “Real personal consumption expenditures for 2019 is 2.4% year-over-year growth. It was 2.6% in 2018.”
But not all is good. “There are really headwinds in the housing market in terms of residential investment,” Kleinhenz said about this important “piece of the consumer equation.” The group expects that residential investment in 2020 will be down 1.3% from 2019’s levels. Because home prices have risen, particularly in the lower third of housing stock, many are now priced out of the market.
More than half of the panel said “the greatest downside risk is trade policy and increased protectionism,” Kleinhenz said. The thorny issue is a major driver of the possibility that growth could collapse by the end of next year. Right now, only 15% of the participants expect a recession in 2019. But by the end of 2020, the number rises to 60%. Because the November election is in the last quarter, if the majority of predictions are right, a recession would begin by then.
Only 35% thought that when the group surveyed its members in March. And these results do not fully take into account the escalated trade war situation. “Since the survey was done between May 6 and 14, 2019, the panelists could not take into account the most recent proposal by President Trump to impose a series of tariff increases from 5 to 25 percent on Mexico,” said Stephen Miller, director of the UNLV Center for Business and Economic Research at the University of Nevada, Las Vegas. “This significantly raises the uncertainty in international markets and would significantly lower the growth forecasts that are reported today as well as increase the projected likelihood of a recession.”
That drives up the chances that CEOs and CFOs could be “hesitant to spend their ample retained earnings gained over the last number of years,” said Benjamin Pace, chief investment officer and partner at Cerity Partners. “This hesitancy could slow economic growth to a trickle and even provoke recession sooner than one needs to occur based on the current strong shape of the US consumer.”
Lower, slower income tax refunds that have dragged on retail sales this year are disproportionately hurting upscale stores, since high-income shoppers are more likely to get an unexpected bill from the Internal Revenue Service under changes backed by President Trump and congressional Republicans.
February revenue at U.S. retailers fell 0.2 percent from the month before to $506 billion, the Census Bureau said Monday, and merchants placed much of the blame on cold weather, stock market fluctuations, and shrinking refunds after a GOP-led tax overhaul that eliminated or cut many of the deductions once claimed by people earning $100,000 a year or more.
Those changes, and Treasury Department efforts to buoy take-home pay through adjustments to withholding tables, left some taxpayers getting little to no money back from the IRS and often having to make surprise payments.
“We see the most risk to households in the upper-income demographics, particularly those that live on the coasts, as they likely get impacted” by limits on state and local tax deductions, said Michael Lasser, an analyst with Swiss lender UBS. That weighs on retailers such as Restoration Hardware and Williams-Sonoma, while leaving discount stores such as Walmart unfazed, he said.
It’s “something that we’re watching closely,” Jack Preston, senior vice president for finance at Corte Madera, Calif.-based Restoration Hardware, told investors and analysts last week. “We’ve heard anecdotes of people being surprised with the tax bills as they prepare their tax returns.”
Overall, however, store owners remain optimistic about the rest of 2019, according to the National Retail Federation, which represents businesses contributing $2.6 trillion a year to the U.S. economy. The group’s chief economist, Jack Kleinhenz, noted that original estimates for January sales were revised upward and that online merchants saw gains compared with both the previous month and February 2018.
“The consumer has not forsaken the economy as some previously claimed,” he said in a statement. “We still expect growth to pick up, fueled by strong fundamentals like job and wage growth.”
The jobless rate remained at 3.8 percent in February, near a 50-year low, and average hourly pay grew 3.4 percent to $27.66, according to the Bureau of Labor Statistics.
- Despite strength in jobs from manufacturing to medicine, retail is one of just two sectors that have lost jobs over the last few years.
- Since January 2017, retail has lost more than 140,000 jobs; the sector added to those losses in March 2019, according to Labor Department data.
- “Retail is a sector where automation has been particularly present,” said PGIM’s Nathan Sheets. “U.S. consumers have manifest over many years that they want low prices, even if that means less help from workers on the floor.”
Though many American industries have ramped up hiring in recent years amid a strong economy and easier regulations under President Donald Trump, one sector in particular has lagged the rest: retail.
Since January 2017, retail has lost more than 140,000 jobs; the sector added to that in March 2019 with a loss of more than 11,000, according to Labor Department data. The sector is one of just two industries that have lost jobs over the last few years, according to data tracked by CNBC.
For example, an aging baby boomer population has fueled employment in the health-care industry, while the post-crisis business sector has supported the addition of tens of thousands of jobs per month. The government’s Friday report on the employment situation showed the health care sector alone added 61,000 jobs in March, while the business industry tacked on another 37,000.
Despite strength in jobs from manufacturing to medicine, retail is one of just two sectors that have lost jobs over the last few years. Since January 2017, retail has lost more than 140,000 jobs; the sector added to those losses in March 2019 with a loss of more than 11,000, according to Labor Department data.
The lukewarm performance in the retail sector have come despite a broader economic groundswell, with Trump’s corporate tax cuts giving businesses a balance sheet boost, goosing GDP growth above the rate many economists feel is sustainable.
The utilities sector, the only other to have seen a net decline in jobs since 2016, employs less than 1 million people. Retail employs more than 15 million.
Theories on the employment softness range from analyst to analyst, most agree that the downtick in the number of people working at big-box retail locations has to do with the rise of e-commerce and technology.
“Broadly speaking, retail is a sector where automation has been particularly present. Self-checkouts are now common. If you’re not sure about a price, you scan the bar code rather than asking a worker,” Nathan Sheets, chief economist at PGIM Fixed Income.
As an example the thriving shift toward automation at retailers nationwide, Walmart announced earlier this year that it is expanding its “Scan & Go” technology to an additional 100 locations across the U.S. For consumer staples like groceries that customers still don’t feel comfortable purchasing online, Kroger’s new “Scan, Bag, Go” platform will allow shoppers to scan their items themselves and allow the chain to cut cashiers at 400 locations.
Gap, Victoria’s Secret, J.C. Penney, Tesla and Abercrombie & Fitch have all announced that they’ll be closing locations in 2019; 4,810 store closures had been announced by retailers by March 2019, according to Coresight Research.
The push toward automation checkouts comes as major retailers and supermarkets come under pressure to generate even more profit out of a razor-thin margin business while offering customers a unique shopping experience.
“As a related point, the ongoing shift in retail from bricks and mortar to online very much reinforces this trend. For online sales, you largely eliminate customer-facing employment,” Sheets added. “U.S. consumers have manifest over many years that they want low prices, even if that means less help from workers on the floor.”
Perhaps emblematic of the struggles of some retailers to keep up in the modern era, the October bankruptcy filing of Sears Holdings represented for many economists a key moment in the shift toward a leaner business model.
Others, like National Retail Federation chief economist Jack Kleinhenz suggested that the government data may not suggest a decline in retail business, but rather a shift in the types of people they employ.
“You could now have a major retailer that owns a warehousing and distribution center, and products never go through a store,” Kleinhenz said. “There has been improvement in productivity and the use of technology. I caution us to be unnerved by these numbers at this point in time.”
“The retail industry is actually in sync with the economy and is growing at a pace that is appropriate, but we have to broaden our scope” of how we measure it, he added.
Instead of employees lining up at brick-and-mortar store locations, the rise of e-commerce is driving demand for transportation and warehousing staff. A current driver shortage beleaguers the trucking industry thanks to a combination of low compensation, burdensome schedules and conditions of the job.
But amid a new generation of consumers accustomed to smartphone shopping and two-day shipping, retail demand for storage square footage is soaring. Some savvy investors, such as Blackstone’s Jonathan Gray, have actually poured money into the warehousing business in an effort to preempt the broader trend and capitalize off the scaling need for space.
Gray told CNBC in July that the firm had purchased more than 550 million square feet of warehousing since 2010.
“As you think about investing, you’re trying to think about sort of where the puck’s going to, what’s happening. We came to a simple view that online sales were going to grow,” Gray said from the Delivering Alpha Conference in New York in 2018. “As a result, we’ve seen this pickup in demand for warehouse space, which traditionally was a pretty boring business.”
“In an environment where it’s hard to invest, finding things you have high conviction in, where you think there’s going to be growth – that’s a pretty good strategy,” he added.
According to numbers released last week by the Department of Labor, retail is one of the few industries losing jobs in a generally stable economic climate.
Retail employment in March was down by 11,700 jobs, seasonally adjusted from February, and down 47,400 jobs unadjusted year-over-year. The United States saw a monthly gain of 196,000 jobs overall (across all industries) in March.
National Retail Federation (NRF) chief economist Jack Kleinhenz, for one, said the numbers don’t paint an accurate picture of the industry. In a statement from the NRF, the economist said the overall growth in employment “paints a picture of resiliency of the U.S. economy” and that “consumer confidence and consumer spending were down earlier in the year, so the retail numbers likely reflect merchants’ hesitancy to add to payrolls under those conditions.”
That may be, but it’s notable that retail has posted job losses for three solid months: Since January 2017, the industry has lost more than 140,000 jobs (including 18,500 jobs in February), according to the Department of Labor.
A confluence of factors is impacting retail’s job growth, say industry watchers. Among them is the downsizing of retail—led by the continued closing of big box and department stores—and an increase in automation, which may be shifting retail’s jobs away from stores and into technology and other back-of-house jobs.
Kleinhenz told CNBC, “You could now have a major retailer that owns a warehousing and distribution center, and products never go through a store. There has been improvement in productivity and the use of technology. I caution us to [not] be unnerved by these numbers at this point in time.”
Overall unemployment in March was 3.8 percent, unchanged from February.
JCK the Industry Authority
There are three types of lies: lies, damn lies and, apparently, retail statistics.
A recent U.S. Department of Commerce retail report showed non-store sales eclipsed general merchandise sales by a narrow margin in February, a first in the history of the government agency tracking such data. News reports on the data said e-commerce had trumped brick-and-mortar retail for the first time. But hold up, retail experts say. Most peg e-commerce to account for between 10% and 12% of all retail sales, with brick-and-mortar making up the rest. Experts Bisnow spoke to unanimously agreed on the recent wave of triumphant e-commerce headlines: fake (retail) news. “The best way to explain it is describing your car and only talking about the tires,” JLL Americas Retail President and CEO Greg Maloney said. “It’s a total misrepresentation of general retail sales and zeroing in on something insignificant that doesn’t tell the story in order to glorify a headline.” The problematic reporting stems from how the Department of Commerce labels retail categories. Non-store sales include online sales, but the category also includes other retail sectors like vending machines and mail-order catalogs. General merchandise, despite the widespread-sounding term, is only a portion of brick-and-mortar sales and excludes automobile sales and food and beverage transactions. Comparing general merchandise to non-store sales as a proxy for brick-and-mortar retail to e-commerce transactions isn’t a fair fight. “Non-store sales are not a true measure of pure e-commerce sales,” National Retail Federation Chief Economist Jack Kleinhenz said. “This just suggests more work needs to be done in better understanding data and what these terms mean.”
The Commerce Department also revises the numbers each month, and there is a good chance the razor thin margin (non-store sales were 11.813% of sales compared to general merchandise’s 11.807% of February retail sales) will change in favor of the brick-and-mortar subset, according to Kleinhanz. “The way it was reported is misleading, and it makes some people scared,” Bialow Real Estate CEO Corey Bialow said. “By no means are online sales surpassing brick-and-mortal retail sales.” Bialow, who is the exclusive broker for digitally native men’s suit brand Indochino across the U.S., still estimates about 12% of all retail sales are made online. But he and other retail experts expect the figure to grow in coming years as younger generations gain more purchasing power. That doesn’t mean the growth will lead to the total demise of brick-and-mortar retail. Plenty of sales made on retailers like Best Buy or Lululemon’s websites were because customers tried the products out in stores first. It just means an omnichannel presence, both online and brick-and-mortar, will be key to courting customers. “Brick-and-mortar is still an integral part of the online shopping experience,” Bialow said. “Amazon aside, most retail sales are being done by omnichannel retailers.”
The overlooked part of the Commerce Department report is how brick-and-mortar and online sales are converging, according to those Bisnow spoke with for this story. Digitally native brands are expanding into brick-and-mortar venues and vice versa. That movement fuels confusion in the retail industry in how sales get reported. An omnichannel retailer like Target can easily categorize sales made online and delivered directly to customers separately from an in-store purchase. But experts aren’t as clear on the reporting of purchases made online but that are picked up in-store or when a customer goes to a brick-and-mortar showroom for a digitally native brand like Indochino or Bonobos for a fitting and makes a purchase but the delivery comes from the same last-mile warehouse used for e-commerce sales. “It’s so cloudy and convoluted that I wish we could get away from all this,” Maloney said. “In the end, it’s all retail sales.”
April 9, 2019 Cameron Sperance, Bisnow Boston
The numbers exclude automobile dealers, gasoline stations and restaurants.
“Retail sales recovered in January after the unexpected drop in December, reinforcing a positive start to 2019,” says Jack Kleinhenz, chief economist, NRF. “American consumers regained confidence as concerns over the government shutdown and stock market volatility faded and trade talks moved in a positive direction. Although some hesitancy is still lingering, it is good to see consumer spending showing traction given the concerns on the minds of American families last month. We expect higher wages and low unemployment to continue to promote consumer confidence in the year ahead.”
As of January, the three-month moving average was up 2.7 percent over the same period a year ago. The January numbers follow an unexpected revised 0.1 percent drop in December year-over-year. November (the first half of the holiday season) grew 5.1 percent unadjusted year-over-year.
NRF does not count October as part of the holiday season, but much holiday shopping has shifted earlier, and October was up 5.7 percent year-over-year.
“Retail sales in December were revised even lower, but these figures remain suspect given the reporting delays caused by the government shutdown,” says Kleinhenz. “The January rebound further calls into question the accuracy and reliability of the December data. The processing of the delayed data is still unclear, and the volatility of the figures reported is difficult to explain at this point.”
The results come as NRF is forecasting that 2019 retail sales will grow between 3.8 percent and 4.4 percent to more than $3.8 trillion. The forecast will be monitored and subject to revision as more data is released in the coming months.
NRF’s numbers are based on data from the U.S. Census Bureau, which reported that overall January sales, including auto dealers, gas stations and restaurants, were up 0.2 percent seasonally adjusted from December and up 2.3 percent unadjusted year-over-year.
Specific retail sectors during January include:
- Building materials and garden supply stores were up 10.4 percent year-over-year and up 3.3 percent month-over-month seasonally adjusted.
- Online and other non-store sales were up 6.3 percent year-over-year and up 2.6 percent month-over-month seasonally adjusted.
- Grocery and beverage stores were up 4 percent year-over-year and up 1.1 percent month-over-month seasonally adjusted.
- General merchandise stores were up 3.2 percent year-over-year and up 0.8 percent month-over-month seasonally adjusted.
- Health and personal care stores were up 2.4 percent year-over-year and up 1.6 percent month-over-month seasonally adjusted.
- Clothing and clothing accessory stores were up 2.1 percent year-over-year but down 1.3 percent month-over-month seasonally adjusted.
- Furniture and home furnishings stores were down 2.5 percent year-over-year and down 1.2 percent month-over-month seasonally adjusted.
- Electronics and appliance stores were down 3.2 percent year-over-year and down 0.3 percent month-over-month seasonally adjusted.
- Sporting goods stores were down 6.2 percent year-over-year but up 4.8 percent month-over-month seasonally adjusted.
March 18, 2009
Was it a gangbusters Christmas shopping season as forecasts and anecdotal evidence suggested? Were consumers making big discretionary purchases in addition to essential spending as they entered 2019, even as some surveys showed confidence was waning? The answers will have to wait, as December retail sales won’t be released as scheduled Wednesday, Jan. 16, while the Commerce Department remains closed. Failure to reopen soon also would delay personal income and spending data, due Jan. 31.
Together, those reports constitute the most widely watched measures of household consumption, which accounts for about 70% of the economy. The disruptions come at a challenging time: Plunging regional gauges of U.S. manufacturing and business surveys indicate a slowdown in growth, and some big-name retailers have issued warnings about mixed holiday results.
For now, investors and analysts will have to rely on a patchwork of data. The Johnson Redbook report showed December sales rose from a year earlier, though it tracks a limited sample of results. The Retail Economist‐Goldman Sachs weekly chain-store sales figures are another source. Other groups provide clues on individual sectors, such as the National Restaurant Association’s monthly index.
The delay in government-issued economic releases “introduces a greater degree of uncertainty, which typically isn’t good,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management LLC. “It does create some real risk of misinterpretation” as people compensate with other, sometimes partial, sources of information, like a retail CEO’s comments.
The nuances in signals from consumers were evident in executive comments from Kroger Co., America’s biggest supermarket chain.
“They feel incredibly good about the economy but very nervous about where things are headed,” Chief Executive Officer Rodney McMullen said Sunday in an onstage interview at the National Retail Federation’s annual trade show in New York.
Credit-card results from companies including Visa and MasterCard would help fill some of the void. The Fed’s Beige Book release on Wednesday may also provide anecdotal details on spending and other parts of the economy. That’s why some investors are taking the data disruptions in stride.
“In a world of big data, there are so many other ways to get a view of the consumer than the monthly numbers from the Commerce Department,” said David Sowerby, portfolio manager at the investment firm Ancora, which manages $6.9 billion.
E-commerce sales during the holiday season jumped 16.5% from a year earlier, according to Adobe Analytics, which measured online transactions from 80 top U.S. retailers.
Still, companies depend on broader economic data to make investment decisions, and without it they’re “to a degree, flying without any instruments,” said NRF chief economist Jack Kleinhenz.
The Commerce Department’s monthly data are crucial to get a bigger picture because about 90% of retail sales come from small businesses, he said. Recently, several large publicly traded retailers such as Macy’s Inc. and Kohl’s Corp. provided discouraging updates.
“It was disappointing news, but I don’t know how pervasive that performance was,” Kleinhenz said.