2016 SOI: Economically, Slow and Steady Wins the Race

Key economic indicators improving—just not very quickly, nelson says

Angel Abcede, Senior Editor/Tobacco, CSP

Though the economic recovery is slow, key indicators bode well for c-stores, according to David Nelson.

Sometimes it’s OK to be likened to a sloth.

To characterize the nation’s economy, David Nelson showed SOI attendees a clip from the film “Zootopia” depicting a sloth as an office clerk, slowly reacting to an impatient, fast-talking rabbit.

“The key word is ‘slow,’ ” said Nelson, professor of economics at Western Washington University and president of Study Groups, Bellingham, Wash. And slow is not a bad thing.

Pointing to areas such as unemployment, inflation and other economic indicators, Nelson told attendees that the current economic recovery has lasted almost seven years—longer than other comparable recoveries.

“[Will] this recovery die of old age?” Nelson said.

Probably not. Since World War II, the length of an economic recovery has had little correlation to a sudden downturn. “Just because the recovery is taking a long time is not an indicator,” he said. “You’ve got to instead look at other indicators of [a pending] recession.”

He cited several slow-moving trends that bode well for the economy:

  • Multiple segments are steadily recovering, including wholesale and retail, manufacturing, construction and the government sector.
  • Gross domestic product (GDP) growth is projected to be about 2% for the next couple of years, a number he describes as low but consistent.
  • Employment numbers are on the rise. The economy has seen 200,000 new jobs a month open up over several months, a strong figure even factoring in lower labor-participation rates.
  • New housing rates are up, which is good for c-stores because construction workers represent a core customer demographic.
  • Inflation rates remain low, a product of lower commodity prices and a strong dollar.

“Better to go slow in the right direction than fast in the wrong direction.”

The sluggish but good news can only benefit the channel, because improved consumer confidence and prolonged low gasoline prices mean increased spending, new-car sales and a surprising rebound in fuel consumption, Nelson said.

Indications Are Good

To support his optimism, Nelson showed charts depicting expansion rates of key sectors of the economy before, during and after the recession. Before the recession of 2008-2009, most sectors—everything from manufacturing to wholesale and retail—were expanding. In the height of the recession, almost everything was contracting. Only the government sector was growing in that time period.

Then, as of the third quarter of 2015, most sectors moved back to the expansion side of the chart, with construction improving dramatically year over year. The only segment showing weakness was manufacturing, possibly due to the strong dollar and drops in U.S. exports.

With the dollar peaking in value in recent months, Nelson said he expects exports to increase and is “quite bullish” for the larger U.S. sales picture abroad. To bolster his point, Nelson said both the Philadelphia and New York federal offices reported their most recent manufacturers’ surveys as trending up.

“It’s evidence the manufacturing recession is ending,” he said.

Dissecting Labor

Nelson spent more time fleshing out the state of labor, a major cost for the c-store channel. In general, employment figures suggest an improved labor market over the past two years. More recently, the economy has created 200,000 or more jobs a month, with 100,000 a month the required number for keeping pace with an expanding labor force.

If monthly averages were to rise over 220,000 a month, “it won’t be long before we run out of workers,” Nelson said. “But it’s great for the economy.”

The issue for retailers is turnover. The simple story is that as consumer confidence and spending grows, jobs become more plentiful. Job-opening rates rise, hiring rates rise and, eventually, quit rates follow.

“Opening rates occurred at a faster rate than new hires, which means greater availability of jobs,” he said. “As a result, people are becoming less attached to their current jobs.”

The “quit rate” during the recession was 1.2%, according to the U.S. Department of Labor, Bureau of Labor Statistics (BLS), but has since risen back to 2%, he said.

Initial claims for unemployment are also at their lowest level in years. Unemployment is now 5%, Nelson said. Comparatively, the Labor Department said the unemployment rate was 5.3% in 2015. It projects 4.7% for this year and 4.5% for next year. “It’s continuing to fall but at a much smaller rate because we’re nearing full employment,” Nelson said.

Of course, many retailers are skeptical about official unemployment rates because they don’t factor in labor participation and people who have simply abandoned the working ranks. Yet even within those specific categories, the news is good.

For instance, the U-1 measure refers to people unemployed 15 weeks or longer, according to the Labor Department. U-3 is the official rate and U-4 includes discouraged workers. U-5 includes what the BLS calls “marginally attached” workers, while U-6 shows workers employed part time for economic reasons.

With those delineations in mind, Nelson said, “Regardless of which one you pick, the two-year change is down sharply in every one of those categories.”

The participation rate actually bottomed out last September, and since that time it has inched up 0.6%, Nelson said. To put it in perspective, he said that if in the next 12 months the participation rates rise another half-percent, at a growth rate of 200,000 jobs a month, the unemployment rate will stay the same. If the participation rate stays the same, then the projected unemployment rate for next year will drop to 3.4% from 4.2%.

Ultimately, retailers will have to do more—whether it’s instituting higher wages or other perks—to retain workers, Nelson said.

“We have a lot of great employers in this room,” he said, citing that half a dozen chains made the “best employer” lists from Forbes and Fortune. “We applaud your effort to create great employees, meet the needs of America’s consumers and build your businesses.”

Continued: Where Does Consumer Confidence Stand?