NEW YORK — Retail sales will improve steadily throughout the year after a slowdown at the end of 2006 carries over into the early part of 2007, according to a forecast by the National Retail Federation at the NRF Convention and Expo here last week.
NRF projected retail sales — excluding auto sales and sales at gas stations and restaurants — would improve by 4.8% overall in 2007, following a gain of 6.3% in 2006. Last year consumer spending started out strong before high energy costs, weak employment growth and the housing slowdown took a toll in the second half.
The pattern in 2007 will be reversed, according to Rosalind Wells, NRF's chief economist.
“It seems the economy is headed for a soft landing,” she said. “The windfall from [home-equity] cash-outs has diminished, and consumers have become more cautious.”
She said she thinks retail sales trends will improve sequentially quarter after quarter, based partly on comparisons with last year's results. She projected retail sales gains of 3.8% in the first quarter, 4.6% in the second, 5.2% in the third and 5.7% in the fourth.
She also said she thinks the Federal Reserve Bank will lower interest rates in the first half of 2007 to spark economic growth in the second half, and that employment and wages will begin to improve again as the year goes on.
She predicted real growth in the gross domestic product of 2.3% in 2007, vs. estimated real GDP growth of 3.4% in 2006. Last year's first quarter GDP growth of 5.6% rapidly tailed off, with estimated growth of 2% in the fourth quarter.
Although the decline in the housing market is expected to persist, its impact on the economy is unknown at this point, Wells said. Lower energy prices should boost consumer spending to help compensate for the decline in home-equity-based spending, she said.
In 2007, consumer spending will be up 2.8% over 2006 levels, Wells projected.
High-end retailers will continue to reap the most sales gains.
“Current retail trends will persist throughout the year,” Wells said. “Luxury retailers will continue to outperform, online shopping will continue to escalate, and retailers catering to low- and middle-income consumers will find achieving sales gains more challenging.”
She predicted that employment growth will remain concentrated in the service sector, although overall job growth “is likely to remain subdued” for 2007. Retailers shed about 58,000 jobs in 2006, she said.
Construction and manufacturing jobs also have been declining, in part due to the weak housing market. Last year the U.S. added a total of 1.84 million jobs, or 153,000 per month, vs. a gain of 1.98 million jobs, or 165,000 per month, in 2005.
HOLIDAY SHORTFALL
NRF estimated that retail sales during the recently ended holiday season (November and December) were up 4.4% over year-ago levels, vs. previous NRF projections of a 5% gain.
Wells attributed the shortfall in part to the decline in the housing market, which resulted in weak sales in building materials and garden equipment in the fourth quarter. She said that if sales declines in those categories were subtracted, holiday sales rose 5.3% for the 2006 season.
“Unseasonably warmer weather and the slower housing market had a clear impact on consumer spending,” she said.
Retailers started out the season with aggressive promotions, and sales started strong, she said. “Then there was a last-minute rush to buy — some stores did well, and some did not.”
Some of the strongest gains were seen at health and personal care stores, which saw an 8.6% sales gain in December, the NRF reported.
Sales of gift cards also continue to increase rapidly, Wells said. Sales during the holiday season totaled $24.8 billion, a 6.3% increase over 2005 holiday-season levels.
Online shopping also continued to accelerate. Web-based retail sales tracked by NRF totaled $21.7 billion in the November-December time frame, up 26%.
Wells said she expected online sales to continue to grow at double-digit rates.
“With the popularity of the Internet, and with all the work that's being done on [retailers' websites], it's not going to tail off,” she said.
