Boosted by Tax Reform, Economic Trends Will Continue in Retailers’ Favor

Print Friendly, PDF & Email

At National Retail Federation’s Big Show this week in New York, retailers were still riding from the better-than-expected holiday season.

Jack Kleinhenz, chief economist for the NRF, moderated a retail economic panel, during which he ticked off the many reasons retail enjoyed such“vibrant’ sales, including job growth, income gains, disposable income growth of 3.5% year-on-year, and increase in credit card use and a decrease in saving.

The ensuing discussion centered around whether the recent gains will be sustainable, the impact of the recent tax legislation and how retailers can prepare for the impending shifts in U.S. demographics.

Gad Levanon, chief economist, North America, for The Conference Board, added to the litany of positives that drove holiday numbers up. “In 2018 the global economy is firing on all cylinders, and that is helping the U.S. economy. The very large increase in stock prices in the last year and rise in home prices are contributing to a wealth effect,” he said, adding The Conference Board sees confidence at its highest in some measures since 2001 or 2000. “The increase in the ability to consume and willingness to consume [means] 2018 will be a solid year of consumption growth in the United States.”

Clearly the market thinks so too.

“Coming out of this holiday, right now the market, the investors are relieved and giddy with what we’ve heard from the companies,” said Brian Nagel, managing director and senior analyst at Oppenheimer & Co, Equity Research.

Nagel said the momentum began in October when spending increased—and for his clients it was a long time coming. “Why this is important from a Wall Street perspective is consumer spending has been ok but not great for two years. We kept coming to the conclusion that given all of the other economic factors out there, spending should be better and it’s not,” he said, adding stagnant wage growth and geopolitical “noise” were likely contributing factors.

Related Article
World Economic Forum Cooks Up Thick Stew of Global Optimism and Political Rancor

With the uptick in sales spread across retail, the holiday performance also served to take the bite out of one big bad wolf in particular. “The concern has been [the erosion of] traditional retail by online commerce, especially Amazon,” he said. “What we saw this holiday, a lot of traditional retailers, whether with their stores or online operations, really held their own. That’s a big positive for the group; maybe Amazon isn’t going to put everyone out of business right away.”

Adding to this positive environment, Washington provided retailers with another ray of light toward the end of last year.

“In 2018 there will be an additional boost to the U.S. economy and consumption in particular and that is the tax cut. There are questions about the long-term impact of the tax cut on the U.S. economy and consumption but for the short run in 2018 and perhaps even in 2019, the impact will be positive,” he said.

Already companies are starting to determine what the windfall from slashed corporate tax rates might mean for them. “Domestic retail is one of the highest taxed in the economy. Most of our retailers are paying an effective tax rate in the upper 30s, call it 38 percent, and with the new corporate tax rate, it’ll take it down to 25,” Nagel said. For example, he added, Costco should save over $400 million a year and Home Depot identified its savings as $1.6 billion.

Nagel said from what he’s hearing in the market, retailers are looking for ways to invest their savings. Walmart has been one of the first to pour a portion of it into its people. The company announced last week that it is boosting its minimum wage to $11 an hour and providing additional parental and adoption benefits to its employees.

Related Article
Asos Unveils New Private Label Performance Activewear Line

Assuming more companies opt to invest in their employees, that should result in another uptick in spending.

Overall, the American public is expected to see a 2 percent increase in disposable personal income in 2018, Levanon said, noting consumers will feel the impact gradually as corporate tax cuts and reparations from companies bringing home offshore profits begin to affect income.

There will be a lag for retailers as well, Nagel said. “A decent analogy may be what we see when we watch gas prices. We see with the consumer there, especially for lower income consumers, they have to get used to seeing [the impact]. It’s not on day one,” he said.

Along with the mostly rosy outlook for 2018 is at least one concern.

“We’re already in a tight labor market, equivalent to the 2007 degree of tightness. 2018 and 2019 look to be strong years. By 2019 we might be at historical tightness, equivalent to late 1990s/early 2000s. In such an environment, labor shortages are going to be a bigger issue,” Levanon said. “Retailers are already starting to struggle will continue to struggle and compromise with quality of employees. Corporate profits have been doing well in the recent quarter due to the bump in revenue but moving forward the tight labor market, which is likely to be with us for at least decade, that will be a downward pressure on corporate profits.”

And as retailers look out even further, they need to keep an eye on broader demographic shifts, the group agreed.

With the better economy, millennials may be coming into their own—and proving demographers who had written them off wrong. “It’s becoming clear that the narrative in the market has changed. Adulthood wasn’t derailed. It was delayed,” Nagel said. Already, he said, Home Depot is seeing a wave of millennials in the home market, and with those property purchases come additional expenditures.

Related Article
Imprima Strengthens US Operations with City Prints and Premier Fabrics Acquisition

“Some of the fastest wage growth has been with millennials and that will translate to faster household spending,” Levanon noted. “They’re not going to live in their parents’ basements forever.”

On the other end of the age spectrum, baby boomers are reshaping retail as they retire and move south and west. Levanon said retailers need to think about how this huge demographic will impact their businesses. “Think about an area like Myrtle Beach. It was a small town but now it’s a major retirement destination,” he said. “We all know baby boomers are aging but the magnitude is underestimated. People ages 70 to 84 will increase by 50 percent in the next decade.”

This content is for Annual, Monthly and Limited members only. You can read up to five free articles each month with a Limited Level Subscription. Please log in, or register.
Log In Register

Recent News

Inditex Shares Tumble to Three-Year Low as JPMorgan Slashes Estimates and Price Target

Inditex SA’s stock fell to its lowest level in three years in trading on the Madrid exchange as JPMorgan cut its estimates and price target for the Zara owner.

This content is for Annual, Monthly and Limited members only. You can read up to five free articles each month with a Limited Level Subscription. Please log in, or register.
Log In Register
Read more