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Stimulus May Stem Decline: NRF

National Retail Federation last week said it projects a 0.5% decline in retail sales for 2009, noting that consumer spending could increase in the second half of the year as a result of a massive, government-sponsored economic stimulus program. This downward cycle will not be easy to break, said Rosalind Wells, the chief economist for NRF, an association representing the overall retail

WASHINGTON — National Retail Federation here last week said it projects a 0.5% decline in retail sales for 2009, noting that consumer spending could increase in the second half of the year as a result of a massive, government-sponsored economic stimulus program.

“This downward cycle will not be easy to break,” said Rosalind Wells, the chief economist for NRF, an association representing the overall retail industry. “We expect a good part of the economy to contract in the first half. The light at the end of the economic tunnel may be apparent in the second half of the year, however, assuming aggressive government policy. The twin stimuli of fiscal and monetary policies should lead to improvement later this year.”

She made her remarks during a conference call discussing NRF's outlook for retail sales in the current year.

It is the first time NRF has ever projected a decline in retail sales, which it has been estimating annually since 1995.

Wells said she expects a decline of 2.2% in the first quarter, followed by declines of 2.8% and 1.1% in the second and third quarters, respectively. The fourth quarter is projected to show a gain of 3.6% over 2008 results, partly because of comparisons with the weak performance in 2008, when fourth-quarter retail sales were down 1.7%. The NRF forecast includes sales for a broad range of retailers but excludes sales from auto dealerships, restaurants and gas stations.

“This year, retailers will be faced with many of the same trends they faced last year,” she said. “Consumers will continue to spend cautiously and will be very price-conscious. Stable goods will be in demand, rather than discretionary purchases. Luxury goods and home goods purchases are likely to be postponed.”

Discount stores, off-price retailers and warehouse clubs will benefit from ongoing consumer trends toward economizing, she said, while department stores and specialty stores will continue to face challenges in attracting customers.

She said NRF is projecting that online retailers will perform better than brick-and-mortar establishments in 2009, although “even they will feel the ongoing effects of a weak economy.”

The gloomy outlook for 2009 follows a year in which retail sales were basically flat for the year, and fell sequentially quarter after quarter from slightly positive to slightly negative. Consumer spending — which accounts for about 70% of the U.S. Gross Domestic Product — has been sharply curtailed as a result of declining home values and the declines in the stock market.

In addition, Wells said, she expects the current unemployment rate of 7.2% to increase in 2009.

Last week, the Conference Board reported that its Consumer Confidence Index had hit an all-time low of 37.7 for January, indicating ongoing consumer “pessimism” on the economy, the Conference Board said.

Retailers, Wells explained, have also reduced their own spending as they wait for consumers to open up their pocketbooks. At the same time, the global nature of the economic recession has ruled out foreign trading partners as saviors of the economy, leaving government action as the only alternative.

“We must look to the government to inject some spending and some stimulus in order to get the other sectors going, and I think the longer they wait, the longer this turnaround will take to occur,” Wells said.

Last week the House of Representatives was expected to pass a version of an $800 billion-plus stimulus package that includes investments in infrastructure and technology as well as tax incentives for both consumers and businesses. The Senate was expected to vote on a slightly different version this week, according to reports.

The NRF reiterated its support for a two-pronged economic stimulus program, including investment in infrastructure to create jobs for the long term, and other incentives to spur short-term consumer spending.

Rachelle Bernstein, vice president at NRF and the association's tax counsel and chief lobbyist on tax matters, said the association was backing the proposals that the Obama administration worked out with Congress.

“We believe that the longer-term investment in infrastructure will create jobs that are very much needed, and that the investment in targeted infrastructure like decaying roads, rails and ports will aid in the conduct of commerce,” she said.

Bernstein added that the NRF was also “not opposed' to any of the proposed tax incentives that have been included in the stimulus bills.

She also agreed that the government needs to spur consumer spending, and reiterated NRF's support for “national sales tax holidays” to drive consumers into the stores.

As previously reported, NRF is pushing for three 10-day sales tax holidays in 2009 — in March, July and October — to get money flowing in the economy. Under the plan, states would have to agree to waive their sales tax for a period of time, during which the federal government would reimburse them for lost sales tax revenues.

NRF estimated its proposal would cost the federal government about $20 billion to $21 billion in total, but such tax-free holidays have been shown to be enormous generators of retail spending in the past, Bernstein said.

“The retail industry's experience with tax holidays is that they provide an immediate boost in consumer spending, and we think that, married with some of the tax cuts that are being considered currently by Congress to aid middle-class taxpayers, would provide a spur to consumer spending and would help the economy in the short term.”

She said some NRF members have reported sales gains of 35%-45% during sales tax holidays in the handful of states that currently offer them.

The tax holidays, she explained, would probably be better than rebate checks for encouraging consumer spending. The tax rebate program of last summer was not as effective as many retailers had hoped, she said.

“Spending was better than it might have been without the rebate checks, but I think everybody was a little disappointed in terms of seeing that money actually spent and circulated throughout the economy.”

One positive sign for 2009 has been the declining cost of fuel, which in itself functions “like a multibillion-dollar tax cut for consumers,” Wells said.

In order for the stimulus package to be most effective at generating retail sales growth, it should be targeted to those consumers who are most likely to spend it immediately out of need, Wells explained. “It all depends on the configuration of the stimulus package, which will be very important,” she said. “The stimulus should affect lower- and middle-income consumers. If that does come about, it will make me more positive about the effect of the stimulus.”

Asked by a reporter on the conference call about what might happen if the stimulus package does not get passed, Wells said the NRF's projections could be too high.

“I think there is pretty wide consensus across the board of a need for this type of stimulus package,” she said. “If it does not happen, or it happens late in the year, things will be a lot worse.”