Archives for June 2021

Sales now expected to top $4.44 trillion this year.

Retail sales are doing better than initially expected earlier in the year.

The National Retail Federation has revised its annual forecast for 2021, projecting that retail sales will now grow between 10.5% and 13.5% to between $4.44 trillion to $4.56 trillion this year. In February, NRF projected that retail sales would grow 6.5%.

By comparison, retail sales totaled $4.02 in 2020. Non-store and online channels accounted for $920 billion of purchases.

“The initial forecast was made when there was still great uncertainty about consumer spending, vaccine distribution, virus infection rates and additional fiscal stimulus, prior to passage of the American Rescue Plan Act,” according to NRF.

NRF expects non-store and online sales to rise between 18% and 23% to a range of $1.09 trillion to $1.13 trillion. Those numbers exclude automobile dealers, gasoline stations and restaurants.

Helping drive sales will be GDP growth. NRF projects that to approach 7%, compared with the 4.4% and 5% forecasted earlier this year. During this quarter, the economy should hit pre-pandemic levels of output.

“We are seeing clear signs of a strong and resilient economy,” NRF Chief Economist Jack Kleinhenz said in a prepared statement. “Incoming data suggests that US economic activity continues to expand rapidly, and we have seen impressive growth. Most indicators point toward an energetic expansion over the upcoming months and through the remainder of the year.”

Personal income has risen because of the sheer amount of both fiscal and monetary policy intervention, which has created an overabundance of purchasing power, according to Kleinhenz. With this rise in spending, he anticipates the fastest growth the US has experienced since 1984.

“The economy and consumer spending have proven to be much more resilient than initially forecasted,” NRF President and CEO Matthew Shay said in a prepared statement. “The combination of vaccine distribution, fiscal stimulus and private-sector ingenuity has put millions of Americans back to work.”

Other sources are also showing a strengthening sales environment. The NPD Group said discretionary retail sales revenue in the US increased by 17% over the first half of the year and rose 18% over 2019 levels, suggesting that the uptick in consumer spending predicted by many experts post-pandemic is beginning to materialize.

With the potential for a strong recovery, the stores that survived the pandemic should be prepared to grow.

COVID forced some retailers to restructure their balance sheets. But, now, the retailers that made it to the other side have shown the resilience to stick around.

“Now, you feel like there are fewer question marks because we’re on the other side,” John Hofmann, commercial production team leader for KeyBank told GlobeSt.com in an earlier interview. “If a retail center performed well in COVID and the retailers were strong in COVID, we feel good. We see less uncertainty in the retail sector than we did pre-COVID.”

Source: “New Retail Sales Forecast for 2021 Significantly Exceeds Earlier Prediction“

American consumers absorbed another surge in prices in May — a 0.6% increase over April and 5% over the past year, the biggest 12-month inflation spike since 2008.

The May rise in consumer prices that the Labor Department reported Thursday reflected a range of goods and services now in growing demand as people increasingly shop, travel, dine out and attend entertainment events in a rapidly reopening economy.

The increased consumer appetite is bumping up against a shortage of components, from lumber and steel to chemicals and semiconductors, that supply such key products as autos and computer equipment, all of which has forced up prices. And as consumers increasingly venture away from home, demand has spread from manufactured goods to services — airline fares, for example, along with restaurant meals and hotel prices — raising inflation in those areas, too.

In its report Thursday, the government said that core inflation, which excludes volatile energy and food costs, rose 0.7% in May after an even bigger 0.9% increase in April, and has risen 3.8% over the past year. That is the sharpest 12-month jump in core inflation since 1992. And it is far above the Federal Reserve’s 2% target for annual price increases.

Among specific items in May, prices for used vehicles, which had surged by a record 10% in April, shot up an additional 7.3% and accounted for one-third of May’s overall price jump. The price of new cars, too, rose 1.6% — the largest one-month increase since 2009.

The jump in new and used vehicle prices reflects supply chain problems that have caused a shortage of semiconductors. The lack of computer chips has limited production of new cars, which, in turn, has reduced the supply of used cars. As demand for vehicles has risen, prices have followed.

But higher prices were evident in a wide variety of categories in May, including household furnishings, which rose 0.9%, driven by a record jump in the price of floor coverings. Airline fares rose 7% after having increased 10.2% in April. Food prices rose 0.4%, with beef prices jumping 2.3%. Energy costs, though unchanged in May, are still up 56.2% in the past year.

From the cereal maker General Mills to Chipotle Mexican Grill to the paint maker Sherwin-Williams, a range of companies have been raising prices or plan to do so, in some cases to make up for higher wages they’re now paying to keep or attract workers. This week, for example, Chipotle Mexican Grill announced it was boosting menu prices by roughly 4% to cover the cost of raising its workers’ wages. In May, Chipotle had said that it would raise wages for its restaurant workers to reach an average of $15 an hour by the end of June.

Andrew Hunter, a senior U.S. economist at Capital Economics, noted that the price category that covers restaurant meals jumped 0.6% last month. He took that as evidence that labor shortages at restaurants, hotels and other service sector companies are beginning to fuel wage and price increases.

The inflation pressures are not only squeezing consumers but also posing a risk to the economy’s recovery from the pandemic recession. One risk is that the Fed will eventually respond to intensifying inflation by raising interest rates too aggressively and derail the economic recovery.

The central bank, led by Chair Jerome Powell, has repeatedly expressed its belief that inflation will prove temporary as supply bottlenecks are unclogged and parts and goods flow normally again. But some economists have expressed concern that as the economic recovery accelerates, fueled by rising demand from consumers spending freely again, so will inflation.

The question is, for how long?

“The price spikes could be bigger and more prolonged because the pandemic has been so disruptive to supply chains,” said Mark Zandi, chief economist at Moody’s Analytics. But “by the fall or end of the year,” Zandi suggested, “prices will be coming back to earth.”

That would be none too soon for consumers like Carmela Romanello Schaden, a real estate agent in Rockville Centre, New York. Schaden said she’s having to pay more for a range of items at her hair salon. But she is feeling the most pain in the food aisle. Her weekly food bill, she said, is now $200 to $250 for herself and her 25-year-old son — up from $175 earlier in the year.

A package of strip steak that Schaden had normally bought for $28 to $32 jumped to $45. She noticed the increase right before Memorial Day but bought it anyway because it was for a family picnic. But she won’t buy it again at that price, she said, and is trading down to pork and chicken.

“I’ve always been selective,” Schaden said. “When something goes up, I will switch into something else.”

So far, Fed officials haven’t deviated from their view that higher inflation is a temporary consequence of the economy’s rapid reopening, with its accelerating consumer demand, and the lack of enough supplies and workers to keep pace with it. Eventually, they say, supply will rise to match demand.

Officials also note that year-over-year gauges of inflation now look especially large because they are being measured against the early months of the pandemic, when inflation tumbled as the economy all but shut down. In coming months, the year-over-year inflation figures will likely look smaller.

Kathy Bostjancic, an economist at Oxford Economics, a consulting firm, suggested that that the effect of these so-called “base effects” will start to recede next month and that year-over-year measures of inflation should, too.

“This will be the peak in the annual rate of inflation,” Bostjancic said in a research note. “While we share the Fed’s view that this isn’t the start of an upward inflationary spiral, we look for inflation to remain persistently above 2% through 2022.”

Indeed, the government’s month-to-month readings of inflation, which aren’t subject to distortions from the pandemic, have also been rising since the year began. Some economists say they fear that if prices accelerate too much and stay high too long, expectations of further price increases will take hold. That, in turn, could intensify demands for higher pay, potentially triggering the kind of wage-price spiral that bedeviled the economy in the 1970s.

Investors so far appear unfazed by the risks of higher inflation. On Thursday, yields in the bond market declined in the hours after the government reported the surge in consumer prices. And stock prices rose.

“Investors were encouraged that drivers of this month’s inflation advance came from factors that indeed are likely to be transitory, such as used auto prices and airline travel,” said Sam Stovall, chief investment strategist at CFRA.

For now, though, rising commodity costs are forcing Americans to pay more for items from meat to gasoline. Prices for corn, grain and soybeans are at their highest levels since 2012. The price of lumber to build homes is at an all-time high. More expensive commodities, such as polyethylene and wood pulp, have translated into higher consumer prices for toilet paper, diapers and most products sold in plastic containers.

General Mills has said it’s considering raises prices on its products because grain, sugar and other ingredients have become costlier. Hormel Foods has already increased prices for Skippy peanut butter. Coca-Cola has said it expects to raise prices to offset higher costs.

Kimberly-Clark, which makes Kleenex and Scott toilet paper, said it will be raising prices on about 60% of its products. Proctor & Gamble has said it will raise prices for its baby, feminine and adult care products.

“There is stronger demand for hotel rooms, air travel, restaurant dining,” said Gus Faucher, chief economist at PNC Financial. “Many businesses are also facing upward pressure on their costs such as higher wages.”

Source: “Another Jump In Prices Tightens The Squeeze On US Consumers“

“The challenging hiring climate has direct and indirect implications for commercial real estate.”

May job creation numbers were once again below expectations, clocking in at 559,000 positions. And with an estimated 8 million job openings across the US and 9.3 million unemployed workers, “a hiring disconnect continues to plague the employment market,” said John Chang, senior vice president and director of research services at Marcus & Millichap.

Many business operators are struggling to fill open positions, forcing many to open at reduced capacity—and this, in turn, will slow the broader economic recovery, according to Chang.

The employment gap can be partially explained by the expanded federal unemployment benefits program, which was recently extended through September 6. That program includes $300 in federal benefits per week on top of any state benefits to which the recipient may be entitled. That may not sound like much, Chang notes, but for many it’s more than sufficient—particularly in cases of families with children, where being at home instead of working means reduced childcare costs.

Twenty-five states have opted to end participation in the federal unemployment program early, with some ending in June and others ceasing participation in July.

“The challenging hiring climate has direct and indirect implications for commercial real estate,” Chang says. “Difficulty in adding staff and upward pressure on wages is forcing some hotels to operate at partial capacity. Even if they can fill all their rooms, some are limited occupancy at 70% because they don’t have the staff to clean them all. Some restaurants are closing one or two days per week because they can’t hire enough cooks and wait staff. And seniors housing facilities are also feeling the pinch as they raise staff compensation to fill positions then have to raise rents to cover the costs.”

A shortage of truckers is also slowing the delivery of goods to retailers, causing shortages and inflationary pressures. Construction worker shortages are also slowing housing delivery.

All of this coalesces to push wages upward and drives inflation, Chang says.  Bank of America recently raised its minimum wage companywide to $20 per hour, for example, and Amazon plans to fill 75,000 positions in its warehouses with jobs that start at $17 per hour. Quick service restaurants like McDonald’s and Chipotle are also following suit by raising their entry-level raises.

“Wage inflation tends to be sticky,” Chang says. “Wages tend to go up but compensation tends not to go down. This could in conjunction with other rising costs drive inflation rates high enough to force the Federal Reserve’s hand, forcing them to tap the brakes on dovish policies that are holding interest rates down.”

The Fed will likely taper their $120 billion monthly purchase of Treasury debt and mortgage-backed securities, Chang predicts. If they do, interest rates would likely rise quickly. Ten-year Treasuries have held relatively stable at the 1.6% range since early March, while the overall CRE cap rate has edged to a record low of 6.3%. But yield spreads are wide because interest rates are low.

Even if interest rates rise, cap rates are unlikely to increase, Chang says, thanks to a record level of capital in the market.

“Investors in the process of making an acquisition or considering an acquisition may want to move expeditiously if they plan on getting financing,” Chang says. “I’m not saying interest rates will go up, but it is unlikely that they will go down measurably anytime soon.”

Source: “Here’s What Those Labor Shortages Mean For CRE Investors“