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?
Consumer Confidence Solid
Other statistics more directly correlated to c-store success also spell opportunity for retailers. With employers doing much better, consumer spending in 2015 had its best yearly performance—up 3% since 2005. Retail sales across channels were up almost 4%, excluding gas.
A related trend is the recovering housing sector, which shows new and existing home sales up from recession lows. Regional variations exist; home prices in cities such as Portland, Ore.; Seattle; San Francisco: Denver; and Dallas all rose well above averages. Housing starts are projected to be 1.1 million this year and 1.2 million in 2017.
“That’s great news for convenience-store operators,” Nelson said. “Construction workers are shopping and buying stuff in your stores.”
Gas prices also played a role in consumer spending and confidence, not only putting more cash into people’s hands but also stimulating automobile sales. Auto sales have doubled from a recession-year low in 2007, he said. Added to the equation is what people are buying—namely, both cars and light trucks.
Since 2013, while the level of cars sold has remained stable, “light trucks are taking off,” Nelson said. “Consumers like big vehicles, and the larger vehicles use more fuel—which you sell.”
Last year, demand for gasoline was up 2.7% to 9.2 million barrels a day, according to the U.S. Energy Information Administration (EIA), challenging an all-time high in 2007 of 9.3 million, Nelson said. This year, the EIA projects the numbers to increase 1% and then drop slightly in 2017 by 0.2%.
Unfortunately, low gas prices have simultaneously cast a gloom over the nation’s oil-producing regions.
As prices bottomed out last February at $26.05 a barrel, bankruptcies, declines in replacement production and a ripple effect up through banks that lended to the energy sector have become the norm. Since early 2015, 51 oil and gas producers have gone bankrupt, energy stocks plummeted and seven of the top global producers replaced only three-quarters of their production levels, Nelson said. The energy sector lost 200,000 jobs in the past year.
That said, other parts of the country, even areas within big oil-producing states, did well. California, Florida and Texas combined gained more than 800,000 jobs. “Even in booming states, you have pockets that are not doing well,” he said.
GDP, Inflation and the Feds
Other core indicators point to slow but steady economic improvement, Nelson said. The gross domestic product, what Nelson described as “real economic growth,” was at 2.4% last year. It’s projected to be 1.8% to 2% this year and 2.1% to 2.5% next year.
In addition, the inflation rate is low, due in part to lower fuel and commodity prices. Nelson said professional forecasters predict a 1.5% inflation rate over the next five years.
With unemployment and inflation rates being so low, the Federal Reserve is less likely to make the types of interest-rate increases they initially alluded to, he said. Going into 2016, the market expected the Feds to raise interest rates four times. Today, prognosticators expect only two. The prime rate will probably hold at 3.26, while 10-year Treasury rates are expected to remain “stable and attractive” at 2% to 2.5%, he said.
While that stability hearkens back to the term “slow,” it’s “better to go slow in the right direction than fast in the wrong direction,” Nelson said.
A Slow Economy in Numbers
Projections put the nation’s recovery into a slow but steady march toward recovery. Everything from housing starts to gross domestic product show consistent improvement.
| 2015 | 2016 | 2017 | |
|---|---|---|---|
| Unemployment rate | 5.3% | 4.7% | 4.5% |
| Light-vehicle sales (millions) | 17.3 | 18.0 | 18.6 |
| Housing starts (thousands) | 1,106 | 1,159–1,275 | 1,221–1,400 |
| Gross domestic product (GDP) | 2.4% | 1.8%–2.0% | 2.1%–2.5% |
| Inflation rate (CPI) | 0.1% | 1.5% | 2.3%–2.6% |
| Prime rate (annual average) | 3.26% | 3.55% | 4.30% |
Sources: Bank of America, Comerica Bank, Energy Information Administration, Merrill Lynch and the U.S. Department of Labor
The Future: 4 Pros and 4 Cons
A slow-growing economy can mean lower population growth, less investment and population shifts. Retailers hoping to thrive in the coming years have opportunities and challenges ahead, ranging from tax advantages to rising wages, according to economist David Nelson.
Here’s a quick list of hurdles:
- A more complex consumer: Demographics and income are shifting amid core c-store consumers, creating marketing, merchandising and supply-chain challenges.
- Creative tax increases: Lawmakers seeking to patch up financial and environmental shortfalls have put forth everything from carbon to soda taxes.
- Labor costs: At least 18 states have recently increased their minimum wages.
- Overtime, sick-leave pay: Increases are pending.
And four things to look forward to:
- A work-opportunity tax credit: Qualified candidates can bring an average credit of more than $1,000 to the company.
- Depreciation deductions: For capital spending of $500,000, retailers can deduct 100% in the current year, which lowers the cost of capital.
- An alternative-fuel infrastructure tax credit: A deductible of 30% exists for eligible alternative-fueling equipment.
- Technological change: Mobile apps, payments, social media, loyalty and better management through data mining, labor scheduling and inventory will create efficiencies and reduce costs.
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