Retailers will enjoy brisk economic tail winds in 2019. A strong labor market should continue to inspire liberal spending, while a robust business climate fuels higher corporate profits. At the same time, economists are starting to see early signs of an inevitable correction.
“The coming 12 months should be a good year for retailers,” said Scott Hoyt, Senior Director of Consumer Economics for Moody’s Analytics (economy.com). “Core retail sales (which exclude the volatile auto and gasoline segments) are expected to grow a healthy 4.7 percent in 2019.”
Happy shoppers are driving the favorable retailing environment.
“Consumers seem to be euphoric right now,” added Hoyt. “The fiscal stimulus in the form of tax cuts, as well as the tight job market, mean there are very few negatives when it comes to consumer fundamentals.”
That tight labor market should constrict still further in the months ahead. Moody’s expects unemployment to drop to 3.4% by the end of 2019, down from the 3.7% recorded at the end of 2018. And it seems the tightening labor market is finally affecting wages, so shoppers have more cash to spend. Average hourly earnings are expected to grow by 3.2% in 2019, up from the 2.8% of 2018 and the 2.6% of the previous year.
Wealthier consumers will support higher price tags in the months ahead, according to Hoyt. The need to increase revenues largely by boosting prices rather than moving more merchandise accelerates a retail trend that began in 2018.
The robust consumer sentiment reflects the energies of a larger economy that is still growing.
“The business cycle has entered its boom phase,” said Sophia Koropeckyj, managing firector of industry economics at Moody’s Analytics. The gross national product (GNP), the most commonly accepted measure of economic growth, is expected to grow at a 2.7% clip in 2019.
Deceleration: Despite the generally sunny outlook, the GNP forecast represents a modest deceleration from the 3.0% growth anticipated when numbers are finally tallied for 2018. And the 2019 retail sales growth estimate is also a deceleration from the 5.0% surge of the previous year.
“There are several reasons for slower growth in 2019,” said Hoyt. “The largest is that deficit-financed tax cuts at the start of 2018 lifted growth. No such support, in terms of an additional increase in after-tax income, is expected in 2019. Job growth will also be slower because of there being fewer available workers.”
Finally, Hoyt added, interest rates will likely be higher, a factor that can have a softening effect.
And to look a bit further down the track, there are signs that the fast-moving economic carriage may be nearing the top of the roller coaster.
“The nation is experiencing robust economic growth, tightening labor and product markets, intensifying wage and price pressures, monetary tightening, and higher interest rates,” explained Koropeckyj. “These characterize a business cycle nearing its end, just prior to a recession.”
Mention of the R-word will ring a bell for the many people who fear the decade-long bull market is getting a bit long in the tooth. Just when is that recession expected to hit?
“We prefer not to forecast recessions, which are often caused by shocks that cannot be predicted,” said Koropeckyj. “However, our forecast for 2020 includes a set of conditions that are consistent with a recession. While we do not expect the textbook definition–two quarters of GDP decline — to occur, real GDP growth is expected to slow to a crawl.”
Other relevant predictions include a too-rapid increase in unemployment, the cessation of job growth, flat industrial production, and a deceleration of personal income growth.
To help draw a bead on the recession’s timing — or maybe just to bring into sharper focus the changing operating environment — Hoyt suggested watching a number of important indicators in the early months of 2019.
“I would keep a close eye on the political environment,” he said “What is going on with tariffs, and is there a risk of a trade war?”
The labor market also looms large, added Hoyt. “How much are wages accelerating, and is the increase fast enough to offset any deceleration of employment growth?”
Beyond that, monitor the interest rate hikes from the Federal Reserve.
“At some point those will start to bite and put a damper on growth,” said Hoyt. “That will probably be an issue for later in 2019, but the faster rates go up the sooner the economy might be affected.”
