Solid Economic Growth Expected in 2017 With New Trump Administration
The economy is expected to head down a positive path this year, but department stores and specialty-store chains will be hitting strong headwinds as more people shop online.
As Macy’s, Forever 21, JCPenney, Sears and Kmart reduce their store footprint and The Limited and American Apparel shutter hundreds of stores, more of the same may be on the way.
Bloomberg News recently reported that Wet Seal is considering another bankruptcy filing—its second since 2015. The retailer, based in Foothill Ranch, Calif., has already closed hundreds of stores located mostly in malls, but business has not improved since it was acquired by Versa Capital Management for $7.5 million in cash.
Despite the gloomy retail-chain outlook, the economy as a whole is expected to be strong this year. The country’s gross domestic product is predicted to climb by as much as 3 percent, a statistic that eluded President Obama during his eight years in office.
As the new president, Donald Trump has promised a basket filled with financial incentives that have some consumers buoyant about their economic future. Some of those incentives include $500 billion in tax cuts arriving in the third quarter of 2017 that will pump up consumer spending.
“I see consumers extremely excited about what they believe is going to be a better economy,” said Britt Beemer, a retail analyst and founder of America’s Research Group, which polls 1,200 consumers a week to take the pulse of their retail-spending attitude. “Forty percent expect to see more overtime at work, compared to only 19 percent last year. That means twice as many people are expecting to get overtime pay.”
Sung Won Sohn, the former chief economist for Wells Fargo and now an economist at California State University, Channel Islands, said the overall economic picture looks very rosy, “but bricks-and-mortar stores will continue to see double-digit decreases in sales.”
Clothing stores are seeing more competition from other product categories when it comes to consumer spending. Sohn points out that young consumers are more interested in acquiring gadgets, such as smartphones and tablets, than fashion merchandise. “I think consumers’ tastes have changed,” he said. “Also, consumers—especially young buyers—are used to getting a good price and value. They know how to shop on the Internet.”
Online sales seem to know no limits. While holidays sales at physical stores were up 4 percent, online sales jumped 11 percent. This year, Amazon.com is predicted to become the largest clothing retailer in the United States, beating out Macy’s, which is trimming 68 stores from its vast retail chain.
Amazon’s clothing and accessories sales are expected to grow nearly 30 percent in 2017 to $28 billion, according to analysts at Cowen & Co., a New York financial services firm. Macy’s apparel sales, by comparison, are expected to drop 4 percent to $22 billion.
By 2021, Cowen expects Amazon to generate $62 billion in annual apparel sales. TJ Maxx is expected to be the No. 2 clothing seller, with $26 billion in sales, and Macy’s is expected to claim the No. 3 spot, with $23 billion in sales.
However, retail sales could take a big hit if Trump goes forward with his promise to slap a huge tariff on Chinese imports. Nearly 40 percent of the clothing imported into the United States comes from China while more than half the shoes and other footwear coming into the United States are manufactured in China.
“If the Trump administration acts on an additional 45 percent tariff on Chinese goods, that could have a devastating impact on retailers,” Sohn said.
The unemployment rate in the United States and California is at a nearly 10-year low. With recent years showing steady job growth, 2017 should continue along the same route.
“The years that we had the biggest-percentage gains in job creation [in California] were 2014 and 2015,” said Robert Kleinhenz, executive director of research at Beacon Economics.
In 2015, jobs in California grew 3 percent and in 2016 they were up 2.6 percent during the first 11 months compared to the same period a year earlier. The unemployment rate for the state was at 4.8 percent in November compared to a U.S. unemployment rate in November of 4.6 percent.
Trump is inheriting a strong labor market compared to Obama, who entered the White House just as the economy was tanking. Obama began his presidency in January 2009 with job losses of about 800,000 that month and unemployment rising toward 10 percent. A big fiscal stimulus early in his first term, along with aggressive policies from the Federal Reserve, helped stabilize the economy, and the job market began to grow in 2010.
In California, job growth from November 2015 to November 2016 has been strongest in educational and health services, up 3.2 percent; government jobs, with a 3 percent uptick; and construction, which had a strong 4.7 percent rise in its labor force.
Other sectors adding jobs over the year were trade, transportation and utilities; information; financial activities; professional and business services; leisure and hospitality; and other services.
The two industry sectors in the state that showed declines were manufacturing, which shed 8,000 jobs, and mining and logging, which lost 11,200 jobs.
With more jobs being created and wages going up, it would seem only natural that more home buyers would be cruising for new homes. But a combination of factors is keeping housing construction from going gangbusters.
“Here’s the dilemma,” said America’s Research Group’s Beemer. “My research of consumers under the age of 30 shows that only 19 percent of them believe they can buy a home in the next 10 years. At the end of the Ronald Reagan presidency, 81 percent of consumers under the age of 30 thought they could buy a home.”
He pointed out that consumers who don’t believe they can buy a home go on to alter their purchasing habits. Instead of buying new furniture and kitchen appliances, they splurge more on personal gadgets, trips and dining out.
Kleinhenz from Beacon Economics observed it is harder for first-time buyers to obtain a home loan. Lenders are upping the minimum credit scores to qualify and mortgage rates are inching up. He said that the standard for getting a loan through Fannie Mae has risen, with the minimum-qualifying credit score being around 750. In the past, a good credit score had been anything above 700. An excellent credit score ranges from 800 to 850.
Finally, millennials are starting to move away from their parents’ homes and into apartments. But more are delaying marriage and starting a family until later in life. “The millennial generation is slow to form households, which is driven by marriage,” Kleinhenz said. “You have to have first-time buyers step into the market to push the whole housing market forward.”