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Is This Retail’s Last Hurrah Before A Recession?

Is This Retail’s Last Hurrah Before A Recession?

Author: Walter Loeb 

Source: Fobres.com 

The outlook for retailing for the rest of this year is good. I see preparations for strong promotions during the last quarter of the year. Retailers are gearing up with early Black Friday promotions, especially since Thanksgiving is a week later than last year.

A late Thanksgiving is usually good for the retail industry, because when the holiday is closer to Christmas, people get into a giving mood a little earlier. They do not need the coaxing to start shopping. I estimate a 4.25% increase in retail sales. Much of the sales increase will be through e-commerce promotions. In addition, retail sales will be boosted with value promotions in many popular products such as smart watches, iPhones, TVs, Alexa-powered devices, computers, PlayStation and XBox; as well as apparel and accessories like handbags, boots and gloves. (It is going to be cold this year!) Much of the merchandise that will be for sale during the holidays was imported without large tariffs or was shipped in anticipation of tariffs. As a result, prices are still stable.

While recent unemployment news is encouraging on the surface—the unemployment rate fell to 3.5% in the most recent report—we are looking at plant closings that will hurt the economy.  I am also worried about 20 years without growth in income for most American families, while education, medical and housing costs have all increased dramatically. Younger family formations—especially millennials—are 50% less likely to own a home than 20 years ago. This adds to increased economic pressure due to uncertainty of future housing costs. Due to these factors, American families have experienced a sharp drop in discretionary income.

So, what about next year?  

It is hard to predict the effect of imposition of stiff tariffs on consumer spending with a shrinking income and a closet full of apparel. One possibility is that consumers might save more (the savings rate right now is at 1.5%) and purchase more secondhand fashion. I believe that higher prices will cut demand very quickly and sale events may be the most important attraction for shoppers.

Experts believe that the apparel and textile industries and retailers will feel the impact of higher priced merchandise very quickly. I have looked at the traits of recessions since 1929 and make the following observations.

1. The policy of protectionism backfired. The fiscal policies of presidents Harding, Coolidge and Hoover favored protectionism of domestic industry and high tariffs. Consumer purchasing power and wages shrank and banks became unprofitable. As a result, we had the 1929 crash.

2. The spike in oil prices caused the 1974-1975 recession. There was concern of longer-term impact.

3. The recession of 1982 was caused by high energy prices and Present Ronald Reagan cut his tax and spending budget. That led to a deep recession.

4. The recession of 1991 saw de-industrialization, which caused loss of good jobs and income inequality.

5. The burst of the dot-come bubble affected shareholders and caused a further recession in 2001-2002. Many textile firms and manufacturers closed plants and moved to cheaper labor factories like China, Bangladesh and India.

6. The Great Recession of 2008 was the result of easy spending and economic speculation. Banks found themselves with worthless investments forcing them to stop making loans to businesses and the stock market collapsed. Consumer spending rapidly declined due to a high of 10% unemployment resulting in a 5% drop in GDP.

Listing some of the causes of recessions, one can conclude that the start of a recession varies, but that generally, a period of uncertainty will cause consumers to stop spending.

I believe that 2020 will be an uncertain year. People will shop for merchandise they need, replacing worn-out electronics or apparel. Much will be postponed for a sunnier day. I expect retail sales to be flat with the previous year. Retailers will hold back on buying to take advantage of opportunistic values. If consumers shop more, they will always find more seasonal merchandise at the last moment.     

 



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