While there were a few retailers which were relatively pleased with their 4th quarter performance - Costco reported better than expected sales, as did Macy’s – many more weren’t. Retailers of all stripes came in under their budgets including Pier 1, L Brands, and Family Dollar. Gap was another retailer that showed no sales increase from last year. And these results don’t include the “discount war” in which retailers such as Neiman Marcus slashed prices by as much as 75% in an effort to clear merchandise before Christmas, something unheard of in better years. But this isn’t the first harsh winter we’ve been through - so why are we experiencing such sluggish sales growth? It’s got to be more than the weather. One answer may lie in the job market.
The labor force plays a critical role in determining retail sales trends, so it seemed appropriate to look at GAFO - General, Apparel, Furniture, and Other - sales change during the past ten years compared to unemployment rates (if you’re not familiar with GAFO categories, think of it as just about any item that is not food, auto, building materials, or drug related.) As illustrated in the table below, GAFO sales took it on the chin in 2008 and 2009, the only two years when sales declined. After bottoming out, 2010-2012 annual sales increased at an accelerated rate, gaining 2.6, 3.9, and 4.4%, respectively. However, in 2013, GAFO sales growth slowed to a modest 1.7%, besting only the two down years of 2008 and 2009.
Unemployment rates during that period largely explain the trend in retail sales in 2003-2013. A strong job market resulted in declining unemployment from 2003 to 2007, lowering the unemployment rate from 6.0% to 4.6%, considered by some to be full employment level. But the unemployment rate jumped to 5.8% in 2008, the start of the Great Recession, and then soared to 9.3% and 9.6% in the subsequent years of 2009 and 2010. The inverse relationship between sales and unemployment held true in 2011 and 2012, when sales gains improved and unemployment rates continued to decline. Then along came 2013!
Last year, while the US experienced another drop in the unemployment rate from 8.1% to 7.4%, GAFO sales gained only 1.7%. Discounting the two negative years of 08-09, it was the worst sales performance of the past decade. After a head scratch or two, a closer look at labor market statistics suggested that unemployment rates fail to tell the whole story.
Since 2003, the number of jobs in the US increased 4.5% but the working population 16 years of age and older increased by 11.1%. Consequently, the number of unemployed increased 30.6% during the same period, equating to an additional 2.7 million jobless. If we shorten the timeline back to 2007 when employment numbers were healthiest, the numbers are even more eye-catching. Since that time, the number of jobs declined by 2.1 million but the working age population gained 13.8 million. In 2007, 63% of persons age 16 and older had a job; in 2013 the percentage dropped to 58.6%.
In a recent report by the National Bureau of Economic Research, Henry Farber, a noted Princeton economics professor, stated that “it is clear that the dynamics of unemployment in the Great Recession are fundamentally different from unemployment dynamics in earlier recessions." The report goes on to say that the average duration of unemployment during this recent downturn was 35 weeks, compared to 20 weeks in previous recessions. The mounting pressure felt during the job search may have been the cause of the reemployed accepting jobs at which they earned 17.5% less than in their previous jobs. Among those who lost full-time jobs, it was 21.8% less. It’s reasonable to infer that the significant drop in wages significantly altered shopping habits as well.
The conclusion is that the next time you hear about bad weather adversely impacting retail sales, it doesn’t hurt to be a little skeptical. People are digging out from a lot more than just snow these days.
Bob Sheehan, Vice President of Research
BSheehan@KeyPointPartners.com
