Consumer confidence, spending survive crash

Discount Store News, May 23, 1988 by Richard Mount

Consumer Confidence, Spending Survive `Crash'

A recession by 1989?

While economic forecasting remains as much an art as a science, the possibility of a recession should be considered for planning purposes only. There does not appear to be, at present, the necessary causes for one to develop by the end of 1989.

Recessions are usually the result of imbalances within the economy: excess inflation, major problems in financial markets, widespread strikes, or the combination of reduced government spending and higher taxes. Recession can also be externally caused by reductions in raw material supplies, exchange rate difficulties or international financial problems.

The U.S. economy remains essentially balanced internally. During the current expansion, agriculture, capital goods, energy, consumer non-durables, autos, housing and non-residential construction have all undergone periods of weak demand. This has kept gross national product growth lower; but has also kept inflation in check and limited the development of broad-scale imbalances.

The economy finds itself in 1988 with four major problems: the federal deficit, the trade deficit, international concerns with the dollar, and problem loans at home and abroad.

Both the federal deficit and the trade deficit are becoming smaller problems as they shrink in both absolute and relative size to the overall economy. The steep drop of the dollar is past, and bankers will intervene to keep it within trading bands by small adjustments in interest rates.

International loan problems cannot be discounted, but if problems do develop, the Federal Reserve Board would reduce rates and worry about the possibility of rising inflation at a later date. If such a problem were to start now, it would not be before the end of 1989 that monetary policy could begin to be tightened.

In short, the economy is in good, overall balance and major problems appear manageable.

Retail Trade

Total retail trade increased 5.1 percent in 1987, exactly the same as in 1986. However, its composition changed dramatically. Auto sales, which had been a major contributor to growth in the current expansion, softened as buyers had to digest purchases in recent years. Auto producers tried to promote sales by bigger and better promotions, but buyers were not ready for more. The rise in auto retail trade, including parts, was only 2.2 percent less than inflation.

Non-auto retail sales, however, increased 6 percent in 1987, up from 4.6 percent in 1986. While most non-auto areas showed sales improvements of at least 5 percent, men's and boys' clothing was up only 0.8 percent and variety store sales only 2.0 percent.

Because of higher inflation in 1987, real sales gains slowed from their 1986 pace. Total real trade was up 1.2 percent in 1987, down from 5.1 percent in 1986. But autos accounted for much of this weakness.

Real non-auto sales were up 2.1 percent in 1987, 5 percent in 1986. Non-auto retail trade softened in the second half of 1987 as consumers turned cautious and built up savings; the savings rate jumped from 2.8 percent in the third quarter to 4.8 percent in the fourth.

Discount Store Sales

Discount store sales are likely to increase 2.9 percent this year and 3.2 percent in 1989, vs. 2 percent in 1987. Last year, consumer spending slowed, especially for non-durables. Non-durables should begin the upswing of a new cycle this year. Inflation is headed higher, especially for imported goods, increasing dollar sales. The economy is slowing, and discounters should gain market share from department stores.

The outlook for the economy, and in particular, for full-line discount stores through 1989 will be determined by three major factors: inflation, exports, and consumer confidence. . Inflation will rise slowly through 1989, with the Consumer Price Index up 4.2 percent in '88 and 4.7 percent in '89 after a 4.4 percent increase in '87. . With the drop in the dollar that has already taken place, real net exports will improve from a negative $136 billion in 1987 to $120 billion in 1988 and $100 billion in 1989. . Consumer confidence was shaken in the fourth quarter of 1987 by the stock market crash, but has recovered.

Inflation

Through 1989, inflation should be rising slowly, putting upward pressure on interest rates. While the direction is up, the trend should be gradual, not sharp. The Consumer Price Index rose 4.4 percent during 1987, and is expected to be up 4.2 percent in 1988 and 4.7 percent next year.

Behind the upturn: higher import prices due to the weakness of the dollar, tighter labor markets, and possible spot commodities shortages. For discounters, higher inflation should be translated into better profits per item and increased sales as consumers shift some of their purchasing from department stores to discounters.

Much attention has been focused on the factors calling for sharply higher price increases through 1989. The two most often cited are: . The decline in the dollar that would increase the price of foreign goods while giving domestic producers more pricing flexibility; . The fall in the unemployment rate to 5.5 percent putting pressure on wage rates in many parts of the country.