Mid-Year Economic Forecast: Signs of Strength Tempered With Notes of Caution
California’s economic outlook for the remainder of the year is good, but it’s not exactly time to pop the champagne cork because the forecast is served with a helping of caution.
A recent economic report by the UCLA Anderson School of Management showed strong job recovery across the U.S. and in California and forecast increased growth in construction, business investment and consumer demand.
“I think things are on solid footing,” said Esmael Adibi, the director of the A. Gary Anderson Center for Economic Research at Chapman University.
The year got off to a slow start, due to several factors, including the work slowdown and chassis shortage during contract negotiations at West Coast ports, which left holiday merchandise stranded on cargo ships. But Adibi said in recent years, the first quarter has been typically been slow.
“Our first quarter for the last 10 years has been lower than what should have been,” he said. “Barring any unexpected events, we think the remainder of [this] year is going to show strong growth in terms of real GDP.”
Events such as the Greek financial crisis threaten to affect the U.S. economy for the remainder of the year, but with no such impediments, Adibi said, the country and the state could see job growth continue.
“That suggests that job creation, which has been relatively strong for the U.S. and California, is going to continue to be strong,” he said. “Job creation is the most important factor affecting California’s economy and consumer spending, retail and manufacturing.”
The Los Angeles County Economic Development Corp. (LAEDC) pegged the employment forecast as flat for nondurable goods in its recent “Los Angeles: People Industry and Jobs 2014–2019” report.
But Ilse Metchek, president of the California Fashion Association (CFA), said the LAEDC’s employment numbers don’t paint the full picture of the apparel industry’s economic health.
“You really can’t talk about the industry as a monolith,” she said.
The state’s employment numbers for apparel manufacturing are down, but the value of imported goods is significantly improved.
“In terms of apparel and textile sales [and the] value of shipments in the LA region, we are above 2010 and 2011 levels—and 2011 was our biggest year,” Metchek said. “It’s not made here, [but] it is part of the industry [and] it is not reflected in the employment numbers.”
Traditionally, summer in California has been strong for the state’s retailers, who typically benefit from tourism spending, Chapman’s Adibi said.
“It all goes back to the broader economy,” he said. As the job picture improves, people will have more discretionary income to spend on travel and tourism activities.
“Tourism should be very strong this year,” he said. “The only negative is foreign tourism is not going to be as strong because the dollar is strong. We’re not expecting as many foreign tourists. They will still come—but not as many as you would hope for.”
Still, more discretionary income overall points to good prospects for California retail.
“When it comes to the retail sector, there is some good news,” Adibi said. In addition to a better job market, consumers have also reduced their debt load, and there’s the “positive wealth effect” of a strong stock market and higher home prices, Adibi said.
“People feel good when they’re a little bit wealthier,” he said.
Plus, the ongoing low gas prices promise to also have a favorable effect on retail spending.
“We have not fully seen the benefit of lower gas prices in terms of shopping,” Adibi said. “I think that’s going to kick in as people realize gas prices are not going to spike back up.”
The only negative Adibi noted was the “anemic wage growth.”
“Even those people who have had jobs haven’t seen a significant raise,” he said, but added, “I think the positives are going to offset this negative, and consumer spending should be relatively strong for the remainder of the year, which should help the retail sector.”
A recent report by real estate investment commercial real estate brokerage firm Marcus & Millichap found that commercial real estate developers are accelerating the timeline on several projects in response to “heightened demand” and pre-leasing commitments are “above 80 percent, indicative of pent-up demand from retailers seeking premium space.”
But according to CFA’s Metchek, some of that demand is coming from non-traditional and start-up retailers. Online retailers are looking for go “clicks to bricks” to drum up additional sales, she said.
“You have the malls opening up their leasing space to start-up companies—not just legacy brands—because they need people to fill the space,” she said.
The retail sector is very fractured, Metchek said, adding that the bricks-and-mortar retailers who are faring the best are those with a “significant online following that brings [shoppers] back into the store.”
New retailers—such as H&M’s minimalist sister brand, COS, which opened its second U.S. store late last year in Beverly Hills—see strong business because they’re the “new kid on the block,” she said.
But Metchek says she sees such success stories as “Peter to pay Paul.”
“That business is coming from somewhere else,” she said. “The business in Eagle Rock or Echo Park or Silver Lake is coming from Robertson. If somebody’s hot, somebody else is cold.”
What’s needed is a significant fashion shift to drive consumers to the store.
“There is nothing you need to buy now to make yourself feel current—even for a fashionista,” Metchek said. “When the contemporary consumer —these people who are fashion leaders—think of a new look, then you’ll see business turn around.”