“It’s silly to think years ago we asked ourselves if we’re a retailer or a technology company. Every retailer has to be a technology company now.”
- Erik Nordstrom, co-president of Nordstrom
Today, we’ve got good news and bad news. Which do you want first?
Let’s start with the good. We got retail sales data from December last week, and it was very good. Headline sales increased 5.8% year over year, way up from 3.3% in November, as the economy avoided the 2018 holiday season contraction. Since consumers have been the primary driver of economic growth, it’s good to see them still spending freely.
It won’t come as a surprise to anyone that online spending played a key role, to the detriment of brick-and-mortar sales. As we are commercial real estate data analysts, and we care a lot about brick-and-mortar, we compiled spending data for traditional, physical retail (such as apparel stores, home supplies and groceries) to make the series shown in blue below. The red line is Redbook’s same-store retail sales data, which tracks spending at retailers on a same-store sales basis. You can see that these two have tracked pretty well historically… up until the last couple of years.
What’s going on? Why are same-store sales running at the highest level of the recovery, while total retail sales for brick-and-mortar stores are stagnant?
As you might suspect, the same-store index has a built-in survivorship bias. When a struggling store is closed, that store drops out of the comparison. Unless you’ve been living in a cave, you’ve seen the endless “Retailpocalypse” headlines reporting on the huge wave of store closures in recent years.
As you can see in the graph below, the vast majority of store closures over the last two years have been big box stores.
That should be no surprise. Closures in 2018 were headlines by some big ol’ stores like Toys R Us and Best Buy, as well as Walgreens/Rite Aid (which aren’t small!)
It seems that we built too much suburban big box power center retail during the previous cycle, and the mass closures experienced over the last few years are the result.
But look at what is happening with mid-size and small stores in the same chart. We’re actually opening more stores than we’re closing. We may actually be witnessing the right-sizing of the retail footprint in America.
And if the chart below is any indication, most of hardest work has already been done.
While the number of store closings hit a new high in 2019, the actual square footage lost proved not to be so severe. Look at some of the retailers that closed the most stores in 2019: Payless Shoes, averaging less than 3,000 square feet per store; Gymboree at around 2,000 square feet; GNC stores are even smaller on average.
Store closures are likely to remain in the headlines because they are typically reported as the number of stores closed and not the total square footage affected (as was the case for Bose last week, which shuttered a fleet of 119 that averages around 3,000 square feet per store). But the right-sizing of the retail footprint is driven by square footage, and based on that measure, it appears the worst is behind us.
Economists like to say a rising tide raises all boats. That certainly was not true for retail. The rising tide of strong consumer spending still sunk a lot of retail “boats,” but the survivors seem to be rising quite well.
That’s the good news.
The bad news is that retail’s health still depends on the consumer… and there is a chance surviving stores will now have to deal with the tide going out. We previously pointed to concern over a less-tight labor market, as wage growth slowed dramatically as 2019 came to a close.
New data released last week confirmed those concerns. The National Federation of Independent Businesses, or NFIB, reported small businesses had much less of an issue finding and paying for labor, and had fewer job openings that they couldn’t fill. These are some of the best leading indicators of labor tightness, and, much like wage growth, seem to show more slack than a year prior.
While these measures are still at relatively high levels, they are clearly rolling over. Friday’s Job Openings and Labor Turnover Survey release for November showed the same, with the largest drop in job openings from a year prior since 2009. That doesn’t ease our concern over the outlook for the labor market in 2020.
Those looking for good news might also look to last week’s housing starts data, which was a blockbuster report. Starts increased a whopping 17% in December, driven by a huge 30% increase in multifamily starts. Regionally, the biggest gainer was the Midwest, which has been a laggard.
Your authors were… skeptical, to say the least. We know this data is heavily seasonally-adjusted (who would break ground on an apartment building in December in the Midwest?), so our first instinct was to check the weather as a warmer-than-usual December could be the culprit. And that does seem to be the case. We’re likely to see a dip in housing starts in the coming months as the weather-related seasonals pass.
Could warmer weather have also messed with the jobs data for December? The retail sector is notoriously weather-sensitive, and we did see 41,200 retail jobs added in the month. More importantly, retail wages rose 4.2% from a year prior, the second strongest from any industry sector. Adding to the warm weather effect was the late Thanksgiving, which pushed more activity into December. We will keep a close eye on retail hiring in the coming months to see if some of this strength reverses, which would create an additional headwind for total U.S. job growth.
The week ahead…
Not to be forgotten, the Fed is analyzing all of this data as well. Hawkish Cleveland Fed President Esther George gave her thoughts on 2020 policy outlook last week, wondering if further rate cuts will eventually be needed. When a hawk talks like that, you should pay attention.
The Fed enters its quiet period next week ahead of its January meeting. The doves on the board may get some additional support soon as Christopher Waller, St. Louis Fed’s director of research, is likely to be nominated by the White House to fill one of the Federal Reserve Board’s open governor seats. Waller is likely to face an easy path to nomination, while the other nominee, the more hawkish Trump economic advisor Judy Shelton, likely faces a more difficult path. Shelton has long been critical of the Fed, including proposing a return to the gold standard.
A weak Consumer Price Index print for December this past week may give the Fed some conviction in reiterating its current dovish stance. This week will likely supply little additional data, with data for existing home sales in December and housing price numbers for November from the Federal Housing Finance Administration highlighting the sparse, holiday-shortened week.
CoStar Economy is produced weekly by Robert Calhoun, managing director and senior economist, and Matt Powers, associate director of CoStar Market Analytics in New York City.
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