California Apparel News

What a difference a year makes.

Last October, we were fretting that gas-pump prices would skyrocket from $2.85 a gallon to $3.50.

Homeowners were watching housing prices plunge to a median $510,000, and a bag of groceries was expected to cost 7.5 percent more than the previous year. Los Angeles County’s unemployment rate was 5 percent.

Those were the good old days.

Today, we are counting our blessings that gas prices have finally dropped to $3.50 a gallon, and homeowners are watching their nest eggs crack, with the median house price in Southern California tumbling to $333,000. A bag of groceries is up 6.1 percent over a year ago. The county’s unemployment rate is 7.9 percent, and the credit markets are so tight you could bounce a bowling ball off them.

“The economy is going south and going south rapidly,” said Christopher Thornberg, principal in Beacon Economics, a Los Angeles research and consulting firm. “The American consumer is on the back end of a 12-year spending spree that is now coming to a crashing halt. The reason it is coming to a crashing halt is that the consumer has been overspending and the savings rate went to zero. It’s great for retailers but bad for the economy in the long run.”

Nobody is predicting a turnaround until at least the middle of next year, if then. For some, the word “recession” is being replaced by “depression.” Hopefully it won’t come to that, but for the short haul, the holiday season is shaping up to look a tad grim.

“You are looking at a situation where you have to see a substantial downturn in consumer spending to get in line with incomes, and this is a process that will occur over the next couple of years.” Thornberg noted.

The UCLA Anderson Forecast, released in late September, noted that the California economy is expected to remain weaker than the overall U.S. economy until real estate and related sectors bottom out and begin to recover.

Unemployment throughout the state is expected to remain in the mid-7 percent range (it is currently at 7.7 percent) because the state economy is not producing new jobs. UCLA economist Jerry Nickelsburg said the fourth quarter will see things getting worse before they get better. He projects a decline of personal income of 0.9 percent in the last quarter of 2008, after being adjusted for inflation, before recovering in the first quarter of 2009.

Consumer radar

Britt Beemer, founder and chairman of America’s Research Group in Charleston, S.C., has his pulse on the United States’ spending habits. His organization surveys 10,000 consumers a week, and he is finding that household incomes are getting so tight that about 25 percent of adults surveyed said they are considering foregoing giving gifts to each other to buy presents for their children. Last year, 5 percent to 7 percent gave up exchanging presents, Beemer said. “We are definitely looking at a serious decline in retail shopping levels,” the researcher said, noting that holiday sales could be in negative territory this year.

The National Retail Federation, however, is sticking with its modest prediction of a 2.2 percent rise in holiday sales. However, stores may be discounting merchandise deeply and earlier than ever. “It wasn’t a rosy forecast to begin with,” said Scott Krugman, a spokesperson for the Washington, D.C., trade group. “There will be winners and losers in all sectors. Those who are quick to handle the economic downturn will win, such as discounters, your warehouse club stores and your dollar stores, frankly. These retailers, where consumers are focused on price, have an inherent advantage.”

Even the ultra-resilient luxury market is not immune from catching an economic cold. “We are seeing a lot of Wall Street layoffs, and these are the core customer for luxury stores,” Krugman said.

Trim the fat or more

Over the last year, retailers have been weathering the economic storms by slashing inventories and going lean. That was seen in lackluster cargo volumes at the ports in Los Angeles and Long Beach.

Inbound container traffic has been in a slow slide all year, which probably helped light a fire under negotiations for a new contract with 25,000 longshore workers on the West Coast. The new contract, which went into effect July 1, was ratified by 75 percent of workers in early September.

At the Port of Long Beach, inbound cargo containers are down nearly 13 percent during the first eight months of this year over the same period last year, totaling 2.14 million 20-foot containers. Next door at the Port of Los Angeles, inbound cargo traffic is down 4.55 percent for the first eight months to 2.765 million 20- foot containers.

The National Retail Federation, in its monthly “Port Tracker” report, noted that major retail container ports in the United States should expect a 6.5 percent drop in cargo volumes this year over last year. “That is a pretty good indicator that department stores and non-apparel stores are forecasting a weak holiday season,” said Eduardo Martinez, an economist with the Los Angeles County Economic Development Corp.

Amazingly, even with dwindling consumer demand, apparelmanufacturing employment in California held even in August, with 55,800 workers, compared with August 2007. “Usually there is a decrease in August and a spike in March and April,” Martinez said. “This is the first time in a while we haven’t seen a year-over-year manufacturing decrease.” Part of the reason might be that manufacturers have shorter lead times on orders to keep inventories down. However, textile-mill employment in the state was down slightly, at 2.1 percent in August.

However, apparel employment may not hold steady. Already, four major U.S. retailers have declared bankruptcy in the last year. They are Mervyns, Goody’s, Steve & Barry’s and Boscov’s in Pennsylvania, one of the last family-owned department stores in the United States, with yearly revenues at around $1 billion. Linens ’n Things also declared bankruptcy earlier this year and is auctioning off the rest of its 371 stores that haven’t closed.

Now everyone is wondering who is next.

“It is going to be a retail blood bath,” American Research Group’s Beemer said. “Consumers won’t be spending again until next year when income-tax refunds come in March, April or May. It probably won’t get better until then.”