By Michael Gabrellian '17
After several years of strong growth following the financial crisis and recession, retail sales in the United States are experiencing slower growth. This is worrisome for a country where roughly two-thirds of gross domestic product is derived from consumer spending. While complete data on the holiday shopping season will not be available until most major retailers report 4th quarter earnings in early February, many analysts are expecting sales to grow at a much slower pace this year than in previous years.
The National Retail Federation estimated that 141 million Americans visited stores or online sites during Thanksgiving weekend, up from 139 million last year. It also said, however, that the average shopper spent $407.02, down from $423.55. Estimates for overall sales that weekend dropped to $57.4 billion from $59.1 billion in 2012.
This has occurred for several reasons. First, after growing nearly 10% since the recession, it will be difficult for consumers to continue increasing spending. Unless there is substantial improvement in the overall economy and a pickup in wage growth, consumer spending will eventually stagnate. Also, Thanksgiving fell on a later date this year, shortening the holiday shopping season by six days.
Some economists also point to the increased use of technology as a headwind for retailers. Online retail sales are expected to grow by more than 20% this year, a sharp contrast to results at traditional brick and mortar stores. As tech-savvy consumers increasingly use computers and smart phones to find the best deals, companies will be forced to cut prices, resulting in shrinking profit margins. A lack of inflation is also harming retailers’ growth potential. Prices for clothing, shoes, watches, and other apparel fell 0.2% in October from a year earlier.
High inventory is another cause for concern for retailers. While an equal ratio is desirable, inventory growth has outpaced sales growth so far this year, a dangerous situation for retailers. Holding too much unsold inventory at the end of year could force retailers to sharply mark down its products, resulting in further decreases to its profit margins.
A more structural issue is that wage growth in the private sector has been almost flat the past few decades when adjusted for inflation. Even during periods of economic expansion, the combination of cheaper labor opportunities overseas and implementation of technology that replaces workers has put millions of jobs at risk. As a result, competition between retailers has intensified severely to gain market share in an industry where overall growth has stagnated.
While lack of growth is never good news, the resilience of consumers the past few years is a reason for cautious optimism. Despite job insecurity, political gridlock, tax uncertainty, and macroeconomic risks, consumer confidence has remained relatively stable. The Thomson Reuters/University of Michigan consumer sentiment index has hovered between 75 and 85 throughout the past two years without much volatility. As a result, many economists predict that if there is a substantial pickup in the US and global economic outlooks, then consumer spending, and retail sales, will begin increasing at a faster rate.
Although the impressive results retailers have reported the past several years will be difficult to replicate, the weaker than expected figures for 2013 are not a cause for panic. Without improvements in the economy, consumers will eventually find it difficult to further increase spending. The fact that spending has not declined, however, is a positive sign. Consumers are in better financial condition than they were before the recession. While spending may remain stagnant without economic expansion, any sign of growth will likely result in a pickup in spending and retail sales.
Sources:http://www.usatoday.com/story/tech/2013/12/16/holiday-shopping-online-stores/4042103/http://online.wsj.com/news/articles/SB10001424052702304579404579236381490513284http://online.wsj.com/news/articles/SB20001424052702304579404579236453467671482http://www.tradingeconomics.com/united-states/indicatorshttp://www.businessweek.com/investor/content/feb2010/pi2010025_902249.htm