Economy Should Pick Up Later in the Year

The Platt Retail Institute, in its January quarterly report, predicted a slow economy this year, and the Commerce Department reinforced the prediction yesterday with its report of flat retail sales in January.

"Most economists expect the U. S. economy to grow 2.3 percent in 2007," Platt writes, "versus a consensus forecast of 3.3 percent in 2006. This compares to 3.2 percent in 2005 and 3.9 percent in 2004." Platt itself thinks 2.1 percent is more likely this year, but on a more positive note, Platt does expect improvement in the last half of this year.

Holiday sales last year rose only 5.3 percent vs. an 8.1 percent gain in 2005, Platt reports, but for the full year, retail sales rose 5.4 percent, bettering the 4.6 percent average annual rate of increase for the last 10 years, as reported by the National Retail Federation. "So one can reasonably conclude that 2006 retail sales were above trend and better than anticipated," Platt says.

The down side of that good news, at least according to Platt, is that a portion of the sales came as a result of heavy discounting at the expense of retail profit margins. "Further retail sales gains will be modest in the first half of 2007 due to such discounting accelerating demand (and sales) into 2006, as well as the overall impact of a moderating economy."

The good news for retailers, Platt says, is that falling oil prices, healthy employment levels and wage gains (including the potential for an increase in the minimum wage) are translating into strong consumer sentiment, which can be an indicator of retail spending trends. The bad news is that housing weakness and higher interest rates are exerting downward pressure on consumers.

The National Retail Federation does share Platt's view with its forecast that 2007 retail sales will grow at 4.8 percent, with "subdued first half economic growth to give way to accelerated sales in the second half."

Not the best forecast, but it could be worse, and -- as always -- consumers could surprise everyone.