It’s that time of the quarter – a multitude of newly-released economic indicators are released and then scoured for hints about the months and year to come. For the retail industry, the initial read on the outlook for 2013 came last week, when the National Retail Federation released its annual sales forecast of 3.4 percent, including online sales growth of between 9 and 12 percent.
Other key government data was released this week, including the latest Conference Board Consumer Confidence Index. The figures show a very cautious consumer with results coming in at 58.6, down from 73.1 in October and at its lowest point since November 2011. Additionally, the Department of Commerce announced that U.S. gross domestic product in the fourth quarter shrank by a 0.1 percent annual rate, down from 3.1 percent in the third quarter. We caught up with NRF Chief Economist Jack Kleinhenz to get the back story on these indicators and how he sees 2013 unfurling for retailers.
Give us some background on lower consumer confidence and the contraction in GDP last quarter. What does this mean for retail?
The announcement on January 30 about the backsliding in GDP in the fourth quarter – on top of lower consumer confidence figures announced the day prior – really is the underpinning for a lot of what we’ll see this year, and also explains a lot about our more moderate forecast for retail sales this year. The flat GDP growth in the fourth quarter hides the fact that households are spending, the housing market is expanding, and businesses are making investments. Consumer spending has been a key factor in the economy. Keep in mind that consumers still need “stuff” for everyday living and so will still buy – they will just buy more moderately this year. Part of this adjustment is due to the 2 percent payroll tax increase that started on January 1 – quite simply, consumers’ take home pay is smaller now than it was in December.
However, in all of this, you can’t underestimate the consumer’s resilience: despite some headwinds, there are also a number of favorable developments. For example, households have reduced their debt burden to the lowest level since the early 2000’s. Less debt means consumers have increased capacity to spend. Additional positive factors: home values are improving, energy prices – while volatile – have actually declined year over year (so, it now costs less at the pump to fill your gas tank or heat your home), and the cost of goods is also lower than it was a year ago. Finally, job growth should continue and actually pick up a bit over 2012 levels.
What are key factors for retailers to keep in mind regarding the outlook for 2013?
Though it’s too early to know the full impact of the tax hikes on Americans’ spending decisions, we do know many people will look to trade down and shop for price more often because of the changes in their paychecks. Retailers no doubt will feel the reduction in consumers’ disposable income this year, but the good news is that retailers have been adjusting for the last few years for a slower growth in consumer spending. In particular, retailers have been grooming their businesses for the right levels of both inventory and employment – key to weathering economically uncertain times. There’s no silver lining to the recent change in the tax structure – but the evolving economic factors are likely not a shock to retailers since they’ve been adjusting to uncertainty for some years now. As always, retailers have to continue to keep their eye on their price-value equation.
What do you think will have the greatest impact on online consumer spending this year?
Our online retail forecast is largely unchanged, as we expect growth in line with 2012. For online sales specifically, we’re looking at growth this year of between 9 and 12 percent. It will be interesting to see whether consumers will use e-commerce more as they manage to both changing macroeconomics and technology. The greatest impact that I see on online consumer spending this year: income and jobs aside, it has to be consumer use of tablets. Tablet sales continue to grow – there are new models and formats, prices are coming down, and tablets are just that much easier for product research and purchase than smaller screen smartphones. In either case, mobile media is on the rise and consumers are spending more time on these devices.
Any last thoughts in summary?
Consumer sentiment is key. It’s shaped by recent tax policies but also the outlook for income and job growth, and hopefully we’ll see a gradual improvement for both of these factors. It will be a tug of war between consumers’ ability to pay and willingness to buy. It will likely take the first half of the year to get through most of the unknowns around fiscal policy and for consumers to get to a sense of equilibrium vis-à-vis the payroll tax. So the key is to get through about June – during the latter half of the year we should be coming out of these uncertainties and heading into more favorable market winds.