NRF Revises Annual Economic Forecast, Expects Stronger Second Half of Year

Retail sales (excluding automobiles, gas stations and restaurants) are expected to advance at a stronger pace for the balance of this year than the previous six months, and should equal or exceed 3.9 percent, compared with the 2.9 percent reported for the first half of 2014.

That said, in the aftermath of a cold start for retailers and a major downshift in overall U.S. economic growth earlier this year, NRF is revising its current 4.1 percent forecast for annual retail sales growth to 3.6 percent.

The revised NRF estimate also reflects downward revisions to final annual retail sales back through 2012 that were made by the U.S. Census Bureau in April. NRF is still expecting non-store sales to increase between 9 and 12 percent.

Going into 2014, my view was that the U.S. economy would continue to improve, led by much more balance across sectors. However, economic growth in the first quarter was weaker than expected due in part to poor weather.

Compared with what was reported at the end of 2013, real estate, inventories and exports were all weaker in the first quarter, thus dragging down any progression and growth expectations. And, while some of the weakness was been reversed in the second quarter, I don’t expect the economy to come roaring back. Further improvement in growth will likely continue at a modest to moderate pace.

Economic fundamentals remain strong but the characterization of the economy is not simple.

Employment during the first six months of this year expanded at its strongest pace since 2005, and households continue to repair their balance sheets. Business and consumer confidence have edged higher, manufacturing activity has expanded, state and local revenues have risen, and inflation pressures remain tame.

Despite these improvements, lackluster income growth, uneven housing demand and the cautious attitude by businesses toward capital spending remain drawbacks in terms of further economic growth. Additionally, there remains a hint that global economic growth is still unsteady, affecting the overall picture for U.S. expectations. 

Looking ahead, consumer spending should grow, benefiting from the ongoing improvement in the labor market and potentially the reported new high for American household’s net worth.

Other positive factors include evidence of pent-up demand and inflation remaining below the Federal Reserve’s target. This growth will keep the Fed on track to raise interest rates sometime in mid-2015, but it will be several years before both short- and long-term interest rates return to normal levels.

While the use of consumer credit has expanded and consumers continue to take advantage of low interest rates to finance big-ticket item, their appetite to leverage up debt with higher-interest revolving credit remains minimal. Consumers continue to be cautious, selective and price sensitive, which raises issues about how fast the economy is expected to grow.

Risks to the forecast remain but are, in fact, balanced. Higher interest rates and events oversees could deflate confidence, but on the upside, employment levels are stronger, which has raised income levels and put consumers in much better shape than currently thought.

Overall, while we are expecting retail sales growth for the year to decrease slightly, we are optimistic that the chances for a stronger economy exist for the rest of the year.

Press Release
WASHINGTON, July 23, 2014 - The National Retail Federation today lowered its retail sales forecast for 2014 because of slow growth recorded during the first half of the year, but said sales are expected to grow significantly faster over the next five months. NRF forecasted in January that retail sales would grow 4.1 percent in 2014 over 2013, but today’s revision lowers the forecast to 3.6 percent.

NRF calculated that sales grew 2.9 percent during the first half of the year and are expected to grow at least 3.9 percent during the second half. The numbers include general retail sales and non-store sales, and exclude automobiles, gasoline stations, and restaurants.

“No retailer was immune to the doldrums witnessed during the first quarter, and as a result, the year’s growth trajectory was impacted,” said NRF President and CEO Matthew Shay. “That said, there is plenty of evidence that the second half of the year will be better for the industry as consumers begin to feel more optimistic about their spending decisions. 

“And though we maintain realistic expectations of retail sales growth in 2014, we are optimistic that the chances for a stronger economy still exist,” continued Shay.

“The severe weather and other factors we experienced earlier this year have taken their toll on retail, but most of those problems are behind us,” said NRF Chief Economist Jack Kleinhenz. “A second look at our forecast shifted our expectations slightly, but it’s important to note that the outlook is positive. Sales are growing and we expect them to continue at a moderate pace.”

In this month’s Monthly Economic Review, Kleinhenz noted, “…one of the worst winters in recent memory kept shoppers home during the first quarter, and weak numbers for real estate, inventories and exports continued to hamper the economy through the second quarter. However, employment has grown at its strongest pace since 2005, business and consumer confidence have edged higher, manufacturing activity has expanded and inflation pressures remain tame, improving expectations for the second and third quarters.”

The revised forecast was announced as Kleinhenz, Shay and NRF Senior Vice Presidents Bill Thorne and David French held a conference call with reporters this morning on the state of the retail industry to discuss the economy, public policy issues and other topics affecting merchants.

Related: Global Economic Outlook for Q2 2014