CSP Magazine

Economy: Cleared for Takeoff

Falling unemployment, rising interest rates: The economy enters a new stage

"Well , folks, we did it.”

That’s how David Nelson, president of Seattle-based Study Group 900 and professor of economics at Western Washington University, at the opening of his presentation referred to the United States’ economic recovery after the Great Recession. As of June 2014, the country finally had recovered all of the jobs it lost during the downturn.

It did take more than six years to do it, which is longer than previous recoveries. But Nelson, a keynote speaker at the summit, was clearly feeling bullish. In his annual outlook, he built a case for a U.S. economy that was finally in a good place.

Falling Unemployment

“This has been a remarkably good news story for us in the last year,” said Nelson, citing an average of 269,000 new jobs created per month over the past year. “That is the best run we’ve had in employment growth since the mid-1990s when Clinton was president.” The country has seen more than 60 consecutive months of positive job creation; according to the most recent data, 5.1 million jobs were open, the highest level in about 15 years.

As of March 2015, the unemployment rate had fallen to 5.5%, which is considered a fully employed economy. The rate is forecast to average out at 5.3% for 2015 and 4.7% in 2016. And the rates have fallen by even a greater percentage among broader unemployment measures: the long-term unemployed, discouraged workers and the underemployed. Unemployment insurance claims are near 15-year lows.

“You get a different number depending on how you define unemployment, but the trend is unmistakable: They’re all down, down, down, no matter how you look at it,” said Nelson.

At the same time, the labor force is not participating at the rate it previously was. When the labor market improves, it’s expected that the unemployed will jump back into the pool. However, the labor-force participation rate has fallen since 2007 from 66% of Americans who are working or looking for work to less than 63% for the past year. Nelson said a few factors led to the stagnation: an aging population, a decline in youth employment and “labor-market scarring,” in which the unemployed basically “get used to not working.”

Wage Growth

Retail average hourly wages have risen 36% since 2000, thanks to an improving economy, rising employment and growing worker scarcity. However, wages are growing at a slower pace than in the past, up 2.1% year over year, compared to a more than 4% growth high point before the recession.

This falling unemployment and wage pressure has triggered a wave of corporate giants—Walmart and McDonald’s, to name a few—to announce increases in their corporate minimum wage. “You’re competing for a lot of the same people as these retailers,” said Nelson.

A steady stream of state minimum-wage increases has also added pressure to wages. Twenty-nine states have minimum wages higher than the federal minimum wage of $7.25 per hour.

Growing alongside wages is turnover. The country bottomed out in 2009 with monthly turnover for retail jobs at 2%, or 24% on an annual basis. That has jumped to 3%, or 36% turnover for all retail on an annual basis.

This creates a real challenge for convenience-store operators, Nelson said: “What’s your plan to deal with a much tighter labor market, with the unemployment rate getting lower, quit rates increasing and wage pressure building, especially among lower-paid, hourly workers?” There is also one fewer applicant per retail position in 2015 than in 2014, he said.

Nelson pointed to retailers such as Kwik Trip who enjoy unusually large numbers of applicants for jobs, thanks to its reputation as a great employer. “What kind of culture are you creating to make people want to work at your organization?” he said.

Falling Oil—and Fuel—Prices

Putting more money in consumers’ pockets is the drop in oil prices, which are down nearly 60% over the past year. Nelson believes oil prices will remain depressed for a much longer period than any time in the recent past because of continued increases in domestic production, thanks to fracking and horizontal drilling from unconventional sources such as shale.

While Saudi Arabia produced 2.4 million barrels per day (bpd) more oil than the United States in 2006, the relationship has reversed. The United States now produces 2.4 million bpd more than Saudi Arabia, and it has become the top global producer.

Meanwhile, in an attempt to maintain market share, OPEC has not trimmed its own production rates despite declining crude prices, which has further increased supply, also pressuring oil downward.

There are clear winners and losers in this scenario. The U.S. economy should see a small increase in gross domestic product (GDP). The consumer comes out a clear winner, enjoying the equivalent of a $750 tax cut per household.

“That means a lot to a lot of households, in terms of their ability to have a bit of discretion in their budgets for spending,” said Nelson.

Also, retailers should benefit because their customers now have more disposable income to spend on purchases. The agricultural and transportation industries’ fuel costs have declined. And the auto industry is enjoying greater sales of profitable SUVs and trucks, rising from a 45% share of sales in 2008 to 55% today.

The Losers: the U.S. oil industry, which has had to cut its capital spending, active rig count and workforce, as well as the states that rely on oil revenue, including Alaska, North Dakota, Texas and Oklahoma. Also, manufacturers that supply petroleum producers are getting hit.

Despite the falling oil and gasoline prices, demand has not exactly rallied yet, held down by structural factors. U.S. consumers are driving fewer miles in vehicles that are more fuel-efficient. According to figures from the University of Michigan Transportation Research Institute, the miles driven per person has fallen 8% over the past 10 years, while the amount of fuel consumed per vehicle has dropped 14%. Miles per gallon by 2014 vehicle model year, however, has jumped 25%.

“That obviously has serious implications for the business you’re all in,” said Nelson.

CONTINUED: Factors Affecting the Economy

Other Factors

Nelson highlighted other headwinds for the economy and industry. U.S. imports are rising, thanks to increased spending because of the growing economy, but exports are not. One reason is that while the U.S. economy is relatively strong, other countries—many in Europe—are just emerging from recession. Another reason: The U.S. dollar is “incredibly strong,” as Nelson described it, rising 20% over the past year, while other major currencies are falling.

“It puts the whole world on sale for people who hold dollars,” Nelson explained, “but it makes our goods priced on the world market in dollars very uncompetitive for the rest of the world.”

The current economic expansion is 70 months old, which Nelson describes as “middle-aged,” and long compared to the 60-month average. It is in line, however, with a trend toward lengthening periods of economic expansion.

“And I think we’ve got a ways to go—I don’t think indicators would suggest a recession is looming any time soon,” he said.

Also, the growth rate for GDP is slowing, averaging 2.8% from 1980 to 2000, for example, but only 1.4% from 2000 to 2012. Real GDP growth during expansions—the most recent happening in 2009—averaged 2.3%; the rate for 2014 was 2.4%. This pace used to run 4% to 5%. Why the lower rate? One factor is demographics, with a labor force growing at a lower rate.

While the economy is currently working through a soft spot—factory orders for nondurable and durable goods are on a decline—experts believe real economic growth will continue in the moderate to healthy range through 2016. With this in mind, the Federal Reserve has choices to make with inflation and interest rates.

“The Fed has a couple of objectives: They don’t want inflation, as they measure it, to rise above 2% for very long,” said Nelson. “But they would like it to be about 2%.” Core inflation is now 1% to 1.5%.

While the inflation rate is expected to rise only 0.1% to 0.2% in 2015, it should grow 2.3% to 2.6% in 2016. “Near-term, the Fed doesn’t have an inflation problem, but farther out, they will. They have to be thinking a little bit ahead,” said Nelson.

The Fed’s pace of tightening monetary policy is up for debate. Arguments for a slower pace would be low inflation, the strong dollar, export weakness and a recent cooling of job growth in March. Factors that argue for a faster pace: low unemployment, the strong economy and the fact that interest rates need to at some point normalize from their record-low levels.

“We just don’t have short-term interest rates near zero hardly ever, except in this recent period,” Nelson said, “and long-term interest rates in the 2% to 3% range.”

Most think the Fed will increase rates sometime in the third quarter, either in June or September, and that they will increase slowly. Expect an increase in interest rates of 0.75% to 1% between now and 2016, but they should remain low relative to historic norms, he said.

Consumers to the Rescue

“Consumers are the bright spot of the economy,” said Nelson. Real consumer spending rose 1.5% from January 2014 to January 2015, which is “very, very bullish for you and your business, and very bullish for the economy.”

Among top consumer spending categories, food and beverages, foodservice and energy goods are industry-relevant areas.

New vehicle purchases are also on the rise. Light-vehicle sales totaled 16.5 million in 2014; they are forecast to hit 17.2 million in 2015 and 17.3 million in 2016, according to Bank of America Merrill Lynch and Comerica Bank. “That’s a huge employer, a huge impact on the economy as a whole,” said Nelson.

Also, while it has not fully recovered, the housing industry is on the mend—a good sign for the convenience industry, which serves the construction class of trade. Nelson pointed to a sharp increase in home equity as a share of household wealth. “We’re becoming more confident that maybe there is some equity in our homes,” he said.

And a steady increase in housing starts over the past few years is yet “another honestly bullish sign for the economy.”

“All things considered, I think we can see the economy continue to grow, with the consumer driving the way,” said Nelson, citing gains in real consumer spending, home price appreciation and construction.

With this greater purchasing power in mind, retailers need to seriously consider the following question: “How can you capture that?”

Unemployment Measures

Whatever the measure or time span, the U.S. unemployment rate is unmistakably and broadly falling. The following two charts show the drop in rate by several unemployment measures, with the comparison to 2010 figures especially striking.

One-Year Look

MeasureMarch 2014March 2015Change
U-1 (unemployed 15 weeks or longer)3.4%2.4%-1.0%
U-3 (official rate)6.6%5.5%-1.1%
U-4 (incl. discouraged workers)7.1%5.9%-1.2%
U-5 (incl. marginally attached)7.9%6.7%-1.2%
U-6 (incl. part time for economic reasons)12.6%10.9%-1.7%

Five-Year Look

MeasureMarch 2010March 20155-year change
U-1 (unemployed 15 weeks or longer)5.8%2.4%-3.4%
U-3 (official rate)9.7%5.5%-4.2%
U-4 (incl. discouraged workers)10.3%5.9%-4.4%
U-5 (incl. marginally attached)11.1%6.7%-4.4%
U-6 (incl. part time for economic reasons)16.9%10.9%-5.0%

Source: U.S. Department of Labor, Bureau of Labor Statistics

Review and Forecast

Rising vehicle sales and housing starts are all good signs for the c-store industry in 2015 and 2016, while rising inflation and interest rates also loom ahead.

Unemployment rate6.2%5.3%4.7%
Light vehicle sales (millions)16.517.217.3
Housing starts (thousands)1,0011,1541,241
Real economic growth (GDP)2.4%3.0%-3.1%2.7%-3.1%
Inflation rate (CPI)1.6%0.1%-0.2%2.3%-2.6%
Federal funds rate0.09%1.06%1.06%

Source: Bank of America Merrill Lynch and Comerica Bank

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