I’m drafting this newsletter from Las Vegas, where the biggest retail real estate conference of the year, ICSC’s RECon is wrapping up, so it’s only appropriate that I focus this issue on consumers and the retail sector. I’d like to highlight two notable themes that have been in the news recently.
First, consumers overall are quite strong and have largely recovered from the recession, as I explained in a recent blog. By just about every key measure, consumers are in better shape now than they were in 2008 at the height of the last cycle: Household debt burdens are down, while their wealth is back at record levels thanks to recovery in the housing and equity markets. In fact, new home prices just this week reached a record level ($321,000) nationally, though existing home prices still have a bit more to go to reach their prior peak. Consumers are also back at work, thanks to the record number of jobs in the economy (now 4% above the prior peak) and unemployment essentially at the “full employment rate” of 5%. Add it all up and consumers are confident and out spending money, which is great for the economy, as consumption constitutes more than two-thirds of our GDP.
But you’d never know it from reading the financial press a couple of weeks back, as one department store after another reported weak April sales. To many analysts, this suggested that the anemic Q1 GDP growth was continuing into Q2, triggering a sell off on Wall Street. Then the Commerce Department reported that retail sales actually had jumped 1.3% last month, their biggest monthly rise in a year. Why the disconnect? Because consumers are spending less in department stores. Aren’t you? More of their budgets are going toward services and other items not typically sold in department stores. Meanwhile, e-commerce is shifting more sales from physical to online retailers. Finally, big-box retailers are capturing a greater share of in-store sales. All of which means, department stores are now a less reliable indicator of consumer strength. Even the best, most innovative department stores (and their landlords) are likely to suffer as consumer spending shifts away from their stores.
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Andrew J. Nelson is Chief Economist for Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.