Consumers can expect low fuel prices, modest gains in household income, and rising home sales. But consumers are still likely to remain somewhat cautious in their spending.
One of the bright spots of the U.S. economy has been consumer spending. That will continue to be the case, as the consumer spending outlook for the next couple of years is solid, premised on continuing strength in a number of areas: real disposable income growth, further gains in auto sales, increasing household real estate wealth, elevated levels of consumer confidence, modest consumer price inflation, and a housing market that is gaining traction. However, there are still several headwinds, such as mounting student loan debt, weak wage growth, slower population growth, and a stock market correction.
IHS forecasts real gross domestic product (GDP) growth of 2.4 percent in 2016 (the same as in 2015) and 2.8 percent in 2017. GDP growth depends to a significant extent on consumer spending, which in nominal terms determines approximately 68 percent of U.S. GDP. Real consumer spending growth is likely to increase by 2.9 percent in 2016 and 3.1 percent in 2017. This may seem disappointing after the 3.1 percent increase in 2015, but it is clearly outpacing the 2.7 percent rate seen in 2014. In fact, consumer spending is providing the largest contribution to real GDP growth since 2005.
The outlook for real disposable income growth also is positive; our forecasts currently are standing at 3.2 percent for 2016 and 3.1 percent in 2017, following a 3.5 percent rise in 2015. All of these are significantly above 2014's reading of 2.7 percent.
The decline in gasoline prices has produced a windfall for consumers. Weekly gas prices (U.S. Department of Energy all grades) fell by US $1.82 per gallon between the first week of July 2014, when gas averaged $3.75 per gallon, and February 1 of this year, when the average price was $1.93 per gallon. In 2015, Americans spent on average $750 per household less on motor fuel than in 2014, and we expect them to spend $380 per household less at the pump in 2016 than they did in 2015.
What else will the economy bring for consumers over the coming year? Here are some additional forecasts:
Consumers will remain somewhat cautious. Looking ahead, the positives clearly outweigh the negatives on the consumer front for 2016. However, while consumer spending is a relatively strong sector of the economy, consumers have not thrown all caution to the wind and will not start spending indiscriminately. Many households are using the "pump-price dividend" from lower gasoline prices to pay down debt, put a little extra money in the bank, and perhaps dine out. Indeed, the personal saving rate in the fourth quarter of 2015 was the highest since the fourth quarter of 2012, and it is projected to be even higher in the first quarter of 2016.
People will eat out more often. Increased levels of consumer confidence, higher levels of employment, lower gas prices, and wage gains surpassing consumer price increases have propelled a larger percentage of consumers' food spending into the "food away from home" category. In other words, restaurant sales are cannibalizing grocery store sales. This category represented 40 percent of total consumer spending on food in the first quarter of 2010 and reached 44.1 percent by the end of 2015. We expect that percentage to rise to around 45 percent by the end of 2016 (see Figure 1).
Auto sales growth will shift into a lower gear. Auto sales remain a bright spot but are less dependent on pent-up demand than in the early years of the recovery. Accordingly, even though the number of vehicles sold is on the rise, sales are growing at a slower pace. Light-vehicle sales will increase from 17.3 million units in 2015 to 17.8 million units in 2016, and are expected to reach a new high of 18.2 million units in 2017. Lower pump prices have helped boost new light trucks' share of total light-vehicle sales above that of new autos. New light trucks' share is likely to stabilize at around 57.5 percent of total light-vehicle sales for 2016 and 2017, up from 51 percent in the first half of 2013.
Consumer spending in other categories will rise modestly. Consumers shifted some of their spending away from autos and more toward apparel, recreational services, computers and software, food and beverages, and home furnishings in 2015. Looking ahead, this trend is likely to stabilize in 2016 and 2017 as consumers' attention cycles back toward purchasing new vehicles.
One of the most important factors influencing consumer spending is the housing market. The outlook is for housing starts to surpass a 1.3-million-unit annualized rate by the end of 2016. New home sales will follow, with new single-family home sales averaging 603,000 units in 2016, the highest level since 2007. Existing home sales are expected to improve modestly, to an average 5.3-million-unit annual rate in 2016. A housing market improvement has considerable impact on consumer spending on home furnishings and "white goods" such as dishwashers, dryers, and refrigerators.
Household income gains will broaden. In 2015, real median household income is expected to be 4.7 percent below its 2007 level. This is a considerable improvement over the readings in 2013 (8.0 percent below the 2007 level) and 2014 (6.5 percent below the 2007 level). Many middle-class families were forced into a lower standard of living during the Great Recession and the subsequent anemic recovery.
The poor performance of real median household income has caused a bifurcation in consumer spending patterns—discount stores are doing well and luxury stores are doing even better, while middle-tier retailers are having a hard time gaining traction. Because the bottom 50 percent of consumers are still struggling, "payroll-cycle economics"—the effect of consumers doing their shopping in the day or two after they are paid—has become increasingly important in this economy.
The good news on the household-income front is that income gains are starting to broaden. Most of the gains between 2008 and 2013 were among the top 5 percent of earners, but in 2014 that began to change; between 2008 and 2014, the top 20 percent saw the most significant income gains. As income gains broaden, the intensity of payroll-cycle economics lessens and consumer spending solidifies. Looking into the future, real median household income is expected to surpass its 2007 level in 2019 due to falling unemployment, modest consumer price inflation, and wage gains outpacing inflation.
Retail: Some will win, some will lose. For all of 2016, we expect retail sales growth to manage a 3.4 percent rate, up from 2.1 percent in 2015. The major gainers in 2016 are likely to be restaurants, e-commerce merchants, building material and garden supply stores, sporting goods stores, and apparel stores. In 2015, there were sizable contractions in sales at gasoline stations, department stores, and office supply, jewelry, and electronics stores. Gasoline stations are likely to see a further decline in 2016 due to falling gasoline prices. Jewelry and electronics stores are expected to reverse course in the New Year, while office supply and department stores are on a structural decline and are losing considerable share to cyber-stores.
Clicks will continue to outpace the bricks in 2016. We expect e-commerce retail sales to represent 8.0 percent of retail trade (retail sales excluding restaurants) this year (see Figure 2). This is compared with 6.4 percent for 2014 and an estimated 7.3 percent for 2015. E-commerce retail sales should continue to grow at double-digit rates from now through 2022.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
A new survey finds a disconnect in organizations’ approach to maintenance, repair, and operations (MRO), as specialists call for greater focus than executives are providing, according to a report from Verusen, a provider of inventory optimization software.
Nearly three-quarters (71%) of the 250 procurement and operations leaders surveyed think MRO procurement/operations should be treated as a strategic initiative for continuous improvement and a potential innovation source. However, just over half (58%) of respondents note that MRO procurement/operations are treated as strategic organizational initiatives.
That result comes from “Future Strategies for MRO Inventory Optimization,” a survey produced by Atlanta-based Verusen along with WBR Insights and ProcureCon MRO.
Balancing MRO working capital and risk has become increasingly important as large asset-intensive industries such as oil and gas, mining, energy and utilities, resources, and heavy manufacturing seek solutions to optimize their MRO inventories, spend, and risk with deeper intelligence. Roughly half of organizations need to take a risk-based approach, as the survey found that 46% of organizations do not include asset criticality (spare parts deemed the most critical to continuous operations) in their materials planning process.
“Rather than merely seeing the MRO function as a necessary project or cost, businesses now see it as a mission-critical deliverable, and companies are more apt to explore new methods and technologies, including AI, to enhance this capability and drive innovation,” Scott Matthews, CEO of Verusen, said in a release. “This is because improving MRO, while addressing asset criticality, delivers tangible results by removing risk and expense from procurement initiatives.”
Survey respondents expressed specific challenges with product data inconsistencies and inaccuracies from different systems and sources. A lack of standardized data formats and incomplete information hampers efficient inventory management. The problem is further compounded by the complexity of integrating legacy systems with modern data management, leading to fragmented/siloed data. Centralizing inventory management and optimizing procurement without standardized product data is especially challenging.
In fact, only 39% of survey respondents report full data uniformity across all materials, and many respondents do not regularly review asset criticality, which adds to the challenges.