NEW YORK FOREIGN PRESS CENTER, 799 UNITED NATIONS PLAZA, 10TH FLOOR
MODERATOR: Welcome, everyone, to the call today. We have the opportunity today to have a briefing by Mark Mathews, Vice President, Research Development and Industry Analysis, of the National Retail Federation; and Jack Kleinhenz, Chief Economist of the National Retail Federation. As a reminder to everyone, this briefing is on the record. We will plan to provide a transcript to participants, and also post on our website following the conclusion of the program. And again, we welcome everyone to participate in the question-and-answer following our speakers’ remarks.
And so with that, I’d like to hand it over. Thank you very much.
MR KLEINHENZ: So this is Jack Kleinhenz. Am I to begin?
MODERATOR: Yes, please.
MR KLEINHENZ: Okay, thank you. I’m pleased to be with you this afternoon and to talk about the U.S. outlook. We certainly do live in interesting times. When you look back about a year ago, and just some mix of headlines or headwinds, risks outside of the general economy, we had certainly the U.S.-China trade tensions, we had discussions on USMCA. There was also global issues, of course, with Brexit.
And here we are still at that same point with several of these issues. I had expected they might have been further along with some reasonable solution, but nonetheless there are some movements, and certainly, when we think about some of the issues that we were facing a year ago, there was the shutdown. The Fed had just finished increasing our interest rates a fourth time. There was a volatile stock market, and of course, there was the shutdown.
So we’ve gone a long way since then. And actually, we’ve gone a long way since the ending of the – excuse me, of the start of the Great Recession. Actually, that Great Recession started in around December of 2007, so 12 years since the onset of the Great Recession. And the financial crisis literature suggests that it takes about 10 years for the economy to recover from a severe financial crisis.
So when you put that into perspective, I mean, we are moving along pretty well, especially since we hit that 10-year mark a couple years ago. And we are beyond it, and I think we should be thinking about sustained expansion and how to foster momentum. And I’ll put it out there: I don’t think a slowdown is – or a recession is necessarily in the cards. People do believe that the passage of time might make for the economy to be vulnerable to a recession, but I don’t think it’s due in 2020. People like making money, and we would need a really big event to knock out the economy. It’s a $20 trillion economy, and I don’t see that happening in the near term.
In fact, I have sort of a low probability for a recession. And there has been, I think, a good deal of decline in most of the forecasters’ probability for a recession. Really it can be attributed to the improvement that we’re seeing in financial variables. We’ve got lower interest rates, a steeper yield curve, the stock market has continued on its path, individuals continue to see growing wages, net worth.
Looking back last year, in fact, we had a forecast of growth in the economy to be about 2.5 percent for the U.S. GDP. It’s looking like it’ll probably come in to about 2.3 percent, so I’m pretty happy about that. There was a lot of uncertainties throughout this year, and certainly trade uncertainty escalated, and the Fed had to pivot. So, I think as we think about the composition of economic growth, it looks different today than it did a year ago. And in fact, I think the economy is on strong footing and a consumer continues to carry the load.
At this point, a preliminary feel for the economy: I think it’s important to be able to put a perspective on how fast will be the growth of the U.S. economy. I’m looking at between 1.7 to 2.0 percent – certainly slower than this year, and slower than the previous year. I do see, though, that we might have a slower start to the first half, but possibly a stronger finish, especially as we think about the aggressive easing and the intervention of the Fed and the ECB to keep short rates stable. And I think that’ll help considerably. I think the underpinnings for growth include the lower interest rates, which should support rate-sensitive segments; for example, certainly households and home purchases and home building.
I think we should see some comeback from business investment. I know it’s been very weak; it’s been out there as a very low performer in the last year or so. But perhaps with some optimism towards trade, that’ll be resolved. And that has – the trade tension certainly has held back investment, and other uncertainties too. I think if that occurs and we do get some satisfaction from some trade agreements, whether it be the China-U.S. deal, the MCSA [sic], or even the Brexit, it should help have a feedback and – to the global growth and feedback into the U.S. economy.
Now, we just saw some good numbers on industrial production today, which kind of gives me an optimism towards a more firmer strength in the economy, but most of that strength is coming from the consumer sector, and that consumer sector is supported by a solid labor market, and I think that’s going to continue along with rising disposable income and net worth. And yet we’ve seen a lot of movement in consumer confidence. It’s been erratic throughout 2019. But I use that more as a barometer than a thermometer. I think it moves certainly based on how consumers actually see the security of their jobs and their income. And we’ve gone through some ups and downs. It’s been kind of wobbly throughout 2019, and for good reasons. But I do believe that the labor market remains healthy and supports gains in jobs and wages.
At this point, until we really get a little bit better handle on some of the data for December and then going into 2020, I’m – my estimates, my forecast that I’ve been supplying to different forecast requests has been between 110,000 to 150,000 monthly employment. And we have to be also reminding that – or the reminder is that the census workers will impact the second and third quarter. About 500,000 will come into the workforce during the peak period during the census, then they will leave, so we have to adjust for that. And – but still yet a healthy labor market. I think it drives wages and it’ll affect the bulk of households.
I expect that our after-tax income continues to outpace the rising debt that households have, and I think they have an increasing cushion of savings. I am not worried about the level of debt. If you look at the ratio of demands on households’ financial requirements to make payments, for whether it’s a mortgage or insurance, et cetera, relative to disposable personal income, it remains still around its lowest level since – in 35 years.
And even though I think we aren’t sure exactly about the tariff situation, there has been some impact, and the higher income has offset some of the higher prices that we have seen from some of the tariffs. Certainly, rising home equity prices will have a benefit to household net worth and to spending. I think the wealth effect is a much stronger one than it had been maybe 10 years ago, largely because we have a larger share of our net worth is in the stock market, and of course, equity prices – home prices have been increasing but certainly not at a rate that would cause me any concern. In fact, some people would say they would like to see it accelerate even further.
But when you look at wages, it too has been fitful over this expansion. If you go back and look at other expansions by most comparisons we’re still below where we would be – again reminding us that as I opened up my discussion, I mean, it takes a long time from a return from a financial recession like we had. So maybe it’s not a good comparison, but nonetheless we would have otherwise thought we would have had 3.5 percent growth year over year in wages based on other recoveries. And so we’re still a little bit behind.
Some explanations by the way which I favor, in fact, is that new and returning workers are earning less than the workers who are leaving the full-time employment. Certainly the aging of the workforce and then retirees are – have had a higher wage rate than some of the new people coming in. So I think aggregate wage growth is being held down to a certain extent by that phenomenon, and we see that the rise in job openings continues. We got the data today – another 7 million or so openings that are out there. And that’ll probably give rise to some wages so that these job openings are filled and the market works.
When I look about the economy, I suggest that it’s going to be moving towards its sort of longer-term trend in the near term, which is not a bad thing based on population growth and productivity. As such, I don’t think unemployment rate’s going to change a heck of a lot from where it is today and possibly contribute to some inflation into 2020. It’s not likely to take off, but it should rise to a certain extent, slowly, and perhaps meet the Federal Reserve’s target. Of course, I’m referring to the CPI, but the Fed’s policy target is the PCE, which has come in lower than the CPI. But we have seen some gross gains, if you will, and inflation.
I think when you look at monetary policy in place that’s on hold; that’s a good thing. It reduces uncertainty. Fiscal policy is still in place, as determined by the Budget Act of 2019. I don’t think we see any extraordinary benefits in 2020, but it’s – I think continues to be positive.
Back to lower interest rates, certainly a market is going to benefit, and we heard some good reports yesterday in terms of the housing market, at least from a builder standpoint. They’re very positive. Lower interest rates certainly will create a benefit for new home construction, potentially also for existing home sales, although part of the reason for the home sales has been a limited supply on the market. And I think the Fed will be watching this closely, as they continue to determine where they want to see rates.
But as I mentioned, I just don’t see a recession in the cards, even though manufacturing remains fairly depressed, as measured by the ISM. But we got some positive news yesterday with the imarket, the market release yesterday on PMI. And I think it’s very possible, based on some of this other data, that maybe we’ve bottomed out in terms of some of the manufacturing slowdown.
Certainly consumers are benefitting from lower gas prices – at this point in time, approximately 20 cents a gallon less than last year, so it does put some more money in people’s pocket.
As we think through 2020 just outlook, I won’t be surprised if we see market volatility, that is stock market volatility. We are in some untraveled pathways, if you will, on how the economy is performing at this pace of growth and how the stock market understands that in terms of it – leading it, in terms of estimating what earnings might be and profits.
And I think that as we go forward consumer confidence will follow in lockstep. I think we’re in a positive trend right now. And again, that’s going to really be important in how it transmits to individuals, in terms of their job and their income security, and a lot depends on that.
Confidence remains elevated, even though it’s moved around a lot. Certainly a positive outgrowth from the tax legislation. And I think that’ll stay in gear, if you will, although it’s certainly not the high gear that we got from the tax legislation in 2018.
So sort of wrapping things up, I would say the economic expansion continues, certainly at a little slower pace. And a lot depends on these uncertainties that I got started off with – certainly trade and global growth. One I haven’t mentioned is certainly the U.S. presidential election and trying to factor that in. I think it’s too early at this point to look at what those issues could mean in terms of economic risks.
So I’d really kind of wrap it up and proceeding with caution, but certainly optimistic. I think the expansion continues. This uncertainty that we’ve been exposed to certainly can and will impact spending decisions. But it’s really been a strong factor, which I mentioned earlier, and really leading this economy has been the consumer, and I continue to believe that they will – the consumer in households will remain reasonably resilient throughout 2020.
And with that, I will send my conclusion and over to Mark Mathews.
MR MATHEWS: Thank you, Jack, and thank you Katie for giving us this opportunity to speak to everybody. Jack just finished up talking about consumer and there are only eight more days until Christmas. Actually today’s pretty much done, so seven more days until Christmas. And the good news is that consumers are out there shopping and shopping in number.
In addition to Jack’s economic analysis, we do a lot of consumer surveys. And this year consumers told us that they’d be spending an average of $1,048 during winter holidays. That’s about 4 percent over last year. And historically, Thanksgiving weekend has been the kickoff for the holiday season. We know that people have started shopping earlier and earlier, but nonetheless, Thanksgiving weekend remains the biggest shopping event on the calendar this year. And we had a tremendous weekend, with nearly 190 million consumers shopping, with spending rising 16 percent over last year, so really strong numbers.
This coming weekend is what we called “Super Saturday,” and it’s traditionally the largest shopping day of the year. And this Saturday, we are expecting 148 million Americans to be out there shopping, which is up more than 13 million versus last year, so again, really, really strong numbers. The consumer is out there in force, and, as Jack said, the consumers are in a strong position. They’ve got deep pockets, and they’re shopping.
And all of this data runs a little bit counter to a consistent media narrative that there is some sort of retail apocalypse going on. And that’s one of the topics I’d like to address today, because, as I mentioned earlier, the data tells a very different story. The first thing that we hear about on a relatively consistent basis is store closures. If you believe the narrative, there’s a store Armageddon that’s happening in this country with record numbers of stores and malls
but the reality is that while store closure numbers are relatively high, there are actually more stores opening than closing, believe it or not. According to research by IHL Group earlier this year, they found that for every company that’s closing stores, five are actually opening stores. We have data from the Bureau of Labor Statistics, which showed that for the second quarter of 2019 there were over 3,700 more retail establishments than in Q2 2018, so a big increase over last year. And, in fact, Q2 2019 – that’s the highest Q2 reading we’ve had since the Great Recession, so really strong numbers.
The growth is being driven by smaller stores. It’s always important to recognize that retail is dominated by small businesses. Over 98 percent of retail companies are small businesses, which we define as having fewer than 100 employees. So there’s a lot of focus on big companies and maybe some of the big companies struggling, but the reality of the matter is that retail is about the American High Street and small businesses.
That’s not to say that the large companies are performing poorly. This past earning season, 66 percent of retailers beat their earnings forecast, and that compares with 62 percent of all companies. And 58 percent of retailers beat their revenue forecast, and that compares with 54 percent of all companies. So retail companies – the bigger, publicly traded companies are outperforming the mean.
So I guess the problem that retail faces is that it’s a sector that resonates with the consumer and, therefore, tends to make the news more easily. When a Toys “R” Us or a Sports Authority goes out of business, consumers pay attention because they recognize these brands. They shopped at these stores. I shopped at those stores. Retailer brands engender positive feelings that consumers tend not to have for other sectors. When a large utility in Texas goes out of business, not many people pay attention. But when that happens to a retailer, it tends to be headline news.
And the problem here is that the focus tends to be on store closings, with people paying a lot of attention to that and not much attention to store openings. It’s like somebody analyzing the population by only paying attention to the number of deaths and completely ignoring the number of births. Retail has a lot of births happening.
The reality of the matter is that 16 retailers were responsible for 73 percent of store closures. It’s natural for industries to evolve and for there to be winners and losers, and what’s happening in retail is typical for any industry, and it’s healthy for both retail and the consumer. You want young businesses to progress and grow, and sometimes it has to have – happen at the expense of existing retailers and bigger brands.
The second point here is the thing that gets blamed most for the demise of retail is e-commerce. And I always like to ask people what percentage of retail sales are made up of e-commerce, and I usually get answers in the 20-60 percent range. Actually, I had someone tell me that 80 percent of retail is e-commerce. The reality is that e-commerce only accounts for about 10 percent of retail sales – just over 10 percent, so a lot less than what people think.
What’s more important though is that e-commerce can’t be killing retail because e-commerce totally is retail. We’ve seen a significant blending of bricks and mortar and e-commerce, to the point where it’s actually hard to distinguish between the two. Nine out of the top 10 largest e-commerce retailers also have brick and mortar stores. We’re getting to the point where it’s hard to tell what’s an e-commerce transaction and what isn’t. With the advent of buy online, pick up in-store, curbside pickup, ship to home, and all the other fulfillment approaches, we have multichannel transactions that may be considered e-commerce by one retailer and a store-based transaction by another. How do you even account for these things? We asked retailers a few years back whether they had changed their attribution methodology in the past year and how they account for an e-commerce transaction or a store-based transaction, and 40 percent of them told us that they had changed it in the last year. So it’s becoming such a fluid thing.
Separating e-commerce from store-based sales probably doesn’t make sense going into the future. The fact is that e-commerce has been a boon for the entire industry, not just the few remaining pure play retailers. It’s a tide that’s lifted all of retail, making it easier for the consumer to shop and easier for the retailer to transact. So I’d prefer to look at it as a strong positive for retail.
So I guess that begs the question of what really is happening. From my perspective, we’re seeing an industry that’s being transformed by technology and consumer preference. There’s a tremendous amount of innovation in our industry right now. People shop in ways that we couldn’t have imagined as little as 10 years ago. Retailers are investing in artificial intelligence and augmented reality. We have smart mirrors, apps that can place the piece of furniture in your living room so you can see what it looks like, store planograms that take you directly to the aisle where the product you want is shelved and tell you how many there in stock. I use these things all the time and they are tremendously helpful.
We also have direct-to-consumer businesses that are growing from nothing to billion dollars in sales in a matter of a few years. Retailers are able to attract consumers from around the world with the push of a button. It used to be that it took decades to build a U.S. live retail business, and nowadays it can happen almost instantaneously. This is something that’s great for startups, but it absolutely poses challenges for established retailers. You used to compete against retail businesses that were in close proximity to you, and now you compete against retailers around the globe. You compete against specialists who can operate in niches because their reach is global. I think it’s Deloitte that used this example of the $20,000 bicycle. Twenty years ago, it would have been very difficult to have a store that sold something like that because the foot traffic that went past that store would be so small that it would be difficult to make it work, but nowadays the world is your oyster as a retailer and you can reach out, and you can find that specific demographic that appeals – or that finds your product appealing. And you can find them across the globe and build up a customer base that’s large enough to sustain your business.
So it really is a industry that’s changing and becoming more competitive. You have socially responsible retailers that are springing up all over the place and peeling off consumers who are aligned with their social values. Competition is intense in our industry, and the great thing is it’s sparking tremendous innovation. In a way, the nature of the store is changing. If you think about the banking industry, when ATMs were introduced, everyone predicted the demise of the bank branch. The reality is that there are just as many bank branches as there ever was; it’s just that their purpose has shifted. The ATM and online banking have taken over the transactional element of banking, and therefore bank branches fulfill a different role in the banking ecosystem.
The same could be said of retail stores as we move into the future. The role of stores in some cases may become less transactional and more about creating experiences and building brand awareness amongst consumers. Experiences and experiential retail is a major trend that we see these days. Retailers want to give the consumer a reason to come into the store and interact with their brand. You have companies like Dick’s Sporting Goods installing batting cages in their stores so consumers can come out and try different bats and experience what it’s like to hit with them. I’m based in Washington D.C. and our team just won the World Series, and that same company, Dick’s Sporting Goods, opened at midnight so they could sell World Series championship t-shirts, and you had people flocking to the stores at midnight. And those are experiences that are really appealing to consumers, and especially younger consumers. We find that millennials and Gen Z look to retailers to create experiences that resonate with them.
So I’m going to stop there so we can have some Q&A. To sum up, the retail industry remains in strong health. It’s growing at – the average for the past five years is 3.9 percent per year. There are a lot of industries that would be thrilled with that sort of growth. Absolutely, yes, it’s rapidly changing, dynamic, and highly competitive, but if you look at the data and you look at the data correctly, if you’re able to separate the signal from the noise, you’ll see that retail continues to reflect the power of the consumer and their deep pockets, and it’s doing especially well heading into this holiday season, and we’re hopeful we’ll get some good numbers.
And on that note, thank you very much for your time, and happy to take some questions.
MODERATOR: Hello, thank you so much. This is Katie. Thank you. I want to offer a sincere thanks to our briefers today before we take a question – some questions from the journalists on the line. I also just want to note, just of course, as I mentioned in the invitation, our nongovernment guests and experts are invited to address our FPC membership but do not necessarily – they offer their views in a personal capacity. They don’t necessarily reflect the views of the U.S. Government.
So with that, I’m happy to turn it over to our moderator for the Q&A. Thank you.
OPERATOR: Wonderful. Ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your touchtone phone. If you’re using a speakerphone, please pick up your handset before pressing the numbers. Again, for questions, please press * – or excuse me, 1 then 0 on your touchtone phone. And one moment as participants queue up.
Our first question today comes from the line of Frank Zhao. Please, go ahead, sir.
QUESTION: Hey, good afternoon. Thank you for having this event, but I have a question. In what way does the U.S. retail industry find the announcement of the phase one trade deal – encouraging or disappointing? What do you expect to happen with regard to the trade talks between the two countries in the coming year? Thank you.
MODERATOR: Mr. Zhao, could you also please note your outlet, your organization? Thank you. And for others as well, please.
QUESTION: Yeah, yeah. Hi, my name is Frank Zhao. I’m a reporter with China Daily USA.
MODERATOR: Thank you.
QUESTION: And for —
MR MATHEWS: Go ahead.
MR KLEINHENZ: Mark, did you want to pick up on that or did you want me?
MR MATHEWS: Go ahead, Jack, if you have a perspective.
MR KLEINHENZ: Well, listen, this is a good signal. It’s a positive signal. But I’m going to wait and see how it all kind of transpires. The delay in the recent tariff impositions is great for the consumer, it’s good for retailers, so, I mean, it’s – I think it’s a good signal, but we still have a far piece to go. It still puts retailers – we haven’t removed tariffs on goods. We just have delayed or deferred not having additional ones. So we’re still in a position where we have to face the facts that it is a tax and ultimately, consumers will have to deal with it in their wallets. It is, to some degree, being offset right now by large firms who can absorb some of the tariff increases that have occurred in 2019 by pushing back onto suppliers or absorbing some of the costs and reducing their margins, but it’s the smaller guys that are getting probably the broadside effect of it, to the extent that they really don’t have the scale and scope that – the larger firms to be able to adjust to it.
And as Mark was saying, we have a large number – I mean, retail is – it shouldn’t just be viewed as just the large merchants out there. There’s tens of thousands of individual firms out there that are small and are dealing with this.
So let me just conclude: I think it’s still a relative risk going into 2020, and I think our – we aren’t putting a forecast out yet, but I think it is – it has the impact of modulating consumer spending to a degree going into 2020 and the overall – overall economy.
QUESTION: Thank you.
OPERATOR: And as a final reminder, for additional questions, please press 1 then 0 on your touchtone phone.
And speakers, nobody else is queuing up at this time.
MODERATOR: Okay. I think we can maybe give everyone maybe just a minute.
MODERATOR: Thank you.
OPERATOR: I’ll give one more reminder. For questions, ladies and gentlemen, please press 1 followed by the 0 to ask a question.
And nobody is queuing up.
MODERATOR: Okay. Well, thank you very much to – again to our briefers. Clearly, their presentations were very thorough for folks who are calling in. So again, we will provide a transcript after the program, but thank you again for – everyone for participating.
MR MATHEWS: Sure, thanks. Thanks a lot.
MR KLEINHENZ: It was a pleasure to be with you today. Thank you and have a happy holiday.
MODERATOR: Same to you.
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