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# 									Resilience in the Time of Covid – The Retail Sector							

FPC Briefing

Jack Kleinhenz, Chief Economist, National Retail Federation

Friday, March 5, 2021 at 11:00 a.m. EST

New York City, NY

March 5, 2021

NEW YORK FOREIGN PRESS CENTER, ONLINE

MODERATOR: Greetings, everyone. Welcome to the Foreign Press Center’s video briefing on resilience in the retail sector with Dr. Jack Kleinhenz from the National Retail Federation. As a reminder, if you have technical problems during the briefing, you can use the chat feature and we will try to assist you. Also as a reminder of today’s ground rules, this briefing is on the record.

I’d like to introduce our briefer, Professor Jack Kleinhenz. Dr. – I’m sorry, Dr. Jack Kleinhenz. Dr. Kleinhenz is the chief economist for the National Retail Federation, the world’s largest retail association. As a professional economist with more than 35 years of experience working with Fortune 500 companies, banking firms, regulators, planners, universities, airports, manufacturers, chambers of commerce, trade associations, nonprofit organizations, and state and local government agencies, Dr. Kleinhenz is known for translating economics into clear and concise explanations and action. He is a certified business economist, CBE, in business, economics, and data analytics. As a reminder, again, our briefer’s opinions are his own and do not represent those of the U.S. Government.

Dr. Kleinhenz will provide opening remarks and give an overview of recent developments and the future of retail in the United States, and then we will open our meeting to questions and answers. So with that, sir, over to you.

MR KLEINHENZ: Thanks, Katie, and good morning to everyone if you’re at morning time or good afternoon or possibly – I’m not sure if anybody’s at an evening hour, but thank you for joining me.

I’m going to begin first of all by maybe a few comments about the past year. It was certainly an unusual one, and I think it’s important we take a quick look back at 2020. In many ways, it sets the stage for what we’re about in 2021. And there was a significant push amongst consumers and polls by business and certainly government to deal with the pandemic in the United States, as we know, and the world. From a retail perspective, some retailers were disproportionately impacted by the pandemic. There was a loss of sales, opportunity for a store to be open, and in some cases they had to be closed. Yet when we look at the overall performance of the industry in 2020, the industry performed pretty – quite well throughout the recession.

And you have to say, well, where is the strength? It – what brought about the strength in that performance? And that really goes down to, what was the consumer and what was the housing sector and how they performed. And as many of you know, the consumer spent – consumer sector is by far the largest part of the U.S. economy, and it’s the biggest factor behind the growth of U.S. spending in 2020 and will be in 2021. And it soared last summer. We saw the huge decline in the second quarter and then the historic increase in the third quarter, and then it fell off somewhat in the fourth quarter, but to a point where we were still running well above our 10-year trend.

And that cause for the decline in the fourth quarter, the pace compared to the third quarter, were certainly pretty obvious: State and cities were ordered to shut down or limit business and, of course, the infection rate resurged. And then the relief bill that was passed for the $900 billion didn’t come about until December 23rd, so that benefit really didn’t provide much for the year of 2020, but certainly provided the springboard for what we’ve already seen in January 2021.

Just some big-picture numbers: In terms of 2020, retail sales grew 6.7 percent on a year-over-year basis to $4 trillion. Now, this figure that I’m quoting you, just so we are, as we say, on the same page – we take the census numbers that get released monthly and we exclude motor vehicles, gasoline, and food service sales. And that percentage change that occurred, 6.7 percent, was a very strong historic – recently historic – growth rate, and that compared to the 3.9 percent in 2019.

Now, we all learned a lot about the digital economy during 2020, and many people were exposed to it for the first time. And we saw online and other non-store sales during the year 2020 increasing 21.8 percent, close to 22 percent, and that far exceeded our forecast. Our forecast was around 12 percent.

Now, to close out the year, I want to just mention – close out this part of the overview – is that we had an extraordinarily good holiday season. The holiday season, defined by the National Retail Federation, includes November and December, and we had a 8 percent growth over the same period of 2019. Now, it was an extraordinary holiday season because many retailers, anticipating the difficulties that consumers might have and also wanting to minimize risks as well as keep people safe, they started the holiday promotions and sales much earlier than November and December. And so we had a fairly good October also. So despite the stalled economy that we had in the fourth quarter, we have really positioned ourselves, I think, as a – in a strong position going forward in 2021.

Now, I’m going to boil it down, in my view, what I think is all about 2021. It’s the non-economic force of the coronavirus. And that’s the major force that is driving this 2021 forecast, and it’s our hope that the vaccine availability can propel the economy along the momentum that has been established in the fourth quarter and that we can see some significant decline in infection, infection rates, which we can then begin to see much of a more normal economy.

Now, some of you might be very interested in how we come about on this forecast. And I am an econometrician, a statistician, so numbers are my friends. And we do a lot of modeling, and we use key macroeconomic concepts. And we have to make some assumptions on how the economy will grow. So any forecast that we make is based on as much data that’s available, but it also has to include some intuitions and assumptions about consumer behavior, fiscal monetary policy, and world economy.

And we do do this on a regular basis, and – but part of the forecast is actually a range, partly because there is a mix of objective and subjective elements in the projections. And I think it calls for it. So let me just begin, first and foremost: Our forecast for 2021 is between 6.5 and 8.2 percent, which should total between 4.33 trillion and 4.4 trillion. Now, that’s a sizable growth rate because the last 5 years, including the very strong year that we had last year, retail averaged 4.4 percent over the past 5 years. Now, that’s significant. And with the expectations that we’re going to grow between 6.5 and 8.2 percent, retail sales hasn’t grown that fast in many years. The last time we were in back-to-back years was back in 2004 and 2005.

Now, we are really entering a period, a second year, because of a positive outlook for retail and for the economy, and we’re optimistic that we’ll have healthy macroeconomic conditions. Just to mention a few indicators that we take into consideration, first of all is disposable personal income. That is important. And we’ve seen increased growth in income and savings, in part due to government support and record low interest rates. Consumer balance sheets are, in the aggregate, very healthy. The debt service for consumers in general, households, is at the lowest in 40 years. That is the amount of debt that I have to pay on a monthly basis as a percentage of my disposable income.

Mortgage rates are at historic lows, and has really buoyed if not really generated a whole new trajectory for the housing market. Who would have known that we would be in such a housing growth market compared to where we were in the last great recession? It is amazing. And it remains robust. And then finally, if we go back over time, our gas prices for the individual homeowner – car owner are still relatively very attractive and are down.

So okay, sort of some macro data. Even further, I’ll give you some of our other assumptions. I’m expecting economic activity in the United States to grow about between 4.5 to 5 percent. Now, this growth estimate is based on the economy, as it were, a few weeks ago. It includes the $900 billion stimulus that was legislated in December. Our estimates do not include any type of assumptions on the current proposed legislation that’s in Congress at this time.

Now, with this amount of economic activity, we’re expecting the consumer growth to be sizable on a real basis, which, when we talk about economic activity, real GDP, it’s 4.5 to 5 percent, while real consumer expenditures are about 4.5 to 4 – 4.6 percent is the assumption. But then we have to add back in inflation because in retail we do things in nominal terms. So if we have 4.5 percent in real purchases, no adjustment for prices, then if we adjust for prices, we get another inflation approximation, and nominal growth for consumers should be around 6.5 percent.

So you can see the consumer is no doubt the driver. In addition, just to mention, there is an excessive amount of savings that’s in households’ wallets and their savings accounts. I just use at last a trillion, but there’s probably in excess of 1.5 trillion and every month it will change because we’re still in a sort of a reduced spending format and there is the impact of stimulus that’s coming into the economy.

We got some very good numbers today on employment. Basically, the economy grew at a much faster rate in terms of jobs. We picked up jobs in retail, I think, of about 40-some thousand jobs, which is a large – a good percentage of what was actually reported at the national level. That is critical as we think about the industry. Retail industry will be growing in the near term. Part of our assumption is that there will be growth in overall – overall job growth of between 220,000 and 300,000 jobs per month for 2021. Why is that important to be said? Because every new job, in most cases, you’re going to have new wages, and then on top of it that becomes more spending. So that cycle is very important as we go further into 2021. So I’m expecting a fairly strong second and third quarter because of that.

We can’t minimize the important that there’s a lot of people – even though unemployment is still sizable, there’s a number of people that are still working and have benefit from wage increases. That extra wage increases provides more spending power. But if it’s not spent, it can be saved. And so again, it just accumulates and can become a significant amount of demand as we go forward into 2021.

The road is never straight when it comes to the economy. And there will be parts of the economy that will do better than others in terms of both geography and/or industries. We are not just one big economy. We have many economies. And it’ll also – how the different regions and states and cities will perform will certainly reflect the demographics, their industrial base, as well as any type of government restrictions that might have been imposed. But I – I’m optimistic, as you can see, and I think most economists are as we think about how the economy shall be performing.

Now, I did mention that households are less leveraged than they were in the last 10 years, and that’s an important factor, because people spend – their willingness to spend is determined by a number of factors, and that would include what their income is, what they have saved, certainly their job outlook, and to the extent of their wealth. And the wealth effect is not large in the United States, but the high stock valuations and home – the values of home increasing certainly puts people in a better stead. And with confidence, when people are confident, they tend to spend and they tend to spend more.

Now, what’s been very interesting – and I’ll kind of wrap up with some other sort of important points to our forecast – is that there’s been a significant amount of purchasing power that has prevailed, and there’s been a shift from purchasing of the services towards goods. And prior to the recession, services represented about almost 70 percent of household spending – 70 percent services, about 30 percent on goods. And this shift has been significant towards goods in the last nine months, largely because people can’t travel, they can’t go out to eat, they can’t do entertainment – a number of factors that – the hospitality industry, the travel industry has been hurt sizably because of the pandemic. But there is that continuation of purchasing of goods over services assumed in our outlook, and I think that that’ll be ongoing for some time. But as we get further into 2021, I think there will be some shifting back to services, especially because those service industries will try to reopen.

Just a couple of other things that I’d like to mention. The strength in spending is really quite interesting, and expectations for spending. The New York Federal Reserve had put out a survey not too long ago, and consumer expectations are for at least 4.2 percent in terms of spending, which is the highest of the spending expectations in in the last five years. So that’s sort of another sort of anecdotal sort of non-hard data piece of information that we took into consideration.

Other kinds of information that we take into consideration are business expectations, and I will cite the Federal Reserve Bank of Atlanta’s business expectation survey. And that survey showed that businesses were expecting sales to grow by 5 percent over the next few months, and employment up 2.7 percent, and we haven’t seen this growth rate since 2019.

Last but not least, in terms of some other additional information, I think it’s important that you also take a look at other high frequency data. The high frequency data that Opportunity Insights produces out of Harvard has shown that actually, the low-income cohort is actually up almost 8 percent and – this is as of February the 20th – that their spending is up 8 percent over a year ago, while middle-income people are up only about 2 percent, and high-income people, so the more affluent, their spending is down almost 6 percent over a year ago, and that down for 6 percent is largely because they can’t go out to dinner, they can’t travel, all of the use of the hospitality services, et cetera.

And then one other point would be is – so the stimulus that we’ve seen and the spending that we’re seeing at the lower end is benefiting from the stimulus that has been put in the economy. And right now, retail is looking pretty strong. We had a very good month for January. We’ll have to see what happens for February. I think the momentum continues. Of course, we had some natural developments, that is major snow and rain that has occurred in in late January and February, and that probably influenced retail sales for the month of February. But I’m still optimistic that it would be fairly strong.

So Katie, with that, why don’t I close off my comments at this time, and I can maybe answer some of the questions by our listeners.

MODERATOR: Thank you so much for your remarks and your presentation. I learned a lot myself, so thank you for that. All right, so let’s open up to questions. To our journalists who are here, if you have a question, please do use the raise hand feature in Zoom, or you can also chat us in the chat feature to let us know you have a question and we will call on you.

MR KLEINHENZ: While we’re waiting for a question, why don’t I just mention that I did not talk about any risks to the forecast.

MODERATOR: Okay.

MR KLEINHENZ: And I think that there are risks, both upside and downside risk. Certainly an upside risk is more prevalent, and that is that if we get more people vaccinated and the infection rate goes down, which appears to be going down reasonably sooner than maybe other forecasts, that’ll be very positive to the overall economy. Of course, the downside risk would be that people do not get vaccinated and we have another set of infections that might come about because that occurs, or the effectiveness of the vaccine is not as good as we thought. We still have a long way to go. We have light at the end of the tunnel because of these vaccines, but it’s not going to be a sure bet to get through 2021 without some speed bumps.

MODERATOR: Thank you. So I’d like to ask again, if anyone has any questions to ask, or if you’re considering asking a question, please just let us know.

MR KLEINHENZ: I get a question often from time to time about the stock market. And I mentioned the performance in the stock market is creating some wealth, but from our perspective, the stock market is not the economy. The stock market reflects expectations of the future of business and speculation on how the economy – and right now, if you interpret some of the data indicators, it’s positive, and I think positive and growing with the expectations of additional stimulus. There’s been a sizeable amount of monetary and fiscal policy that has pushed a lot of liquidity into the economy – well needed because of the recession that we have. So I would just suggest that there is a disconnect, because it’s a natural disconnect because it’s looking much further down the pike than the current economy and some of the data that we get in on a daily basis or – yes, on a monthly basis.

Oh I – one last piece now that I – I keep on thinking of little pieces and parts. People are – there’s a lot of discussion about inflation and price increases, and we have seen price increases in retail largely because of a demand situation. We haven’t been able to provide as much product in some of our categories. There’s a pent up demand for certain products because possibly products couldn’t be manufactured as quickly as the demand is there.

And of course, there’s also been some issues with importing of products into the United States. There’s a big backlog of shipping that’s on the west coast, that the ships have been stalled there for weeks waiting to be unloaded. That is complicated because of the fact that there’s been a shortage of truckers, because of the pandemic as well as from a demographic standpoint. So trying to get those products to the appropriate markets has been a challenge, and that’s impacting the cost of certain products.

Now, there’s some natural price increases that we have seen in the food and beverage sector largely because the pandemic impacted the manufacturing and the growing or raising of meats, if you will, proteins. So we’re seeing some price increase there, and then some price increases in wood-related products because, again, that needs to be imported.

And so going forward, I don’t see significant inflation this year. We might see some above trend in certain product lines, but I am a little bit worried as we go further out into 2022 as to how the amount of stimulus might impact the overall price level. And thinking about 2022, I don’t anticipate employment to get back to where we left off until well into 2022, or possibly more likely into 2023.

In 2021, we’ll come back to where we left off in economic activity, real GDP compared to a year ago, and I believe that by the third quarter, consumer spending will have regained all of the spending that was there back a year ago. The laggard is going to be employment, and it’s going to take some time for that to get some steam in the boiler, if you will. It took us about four to four and a half years to get back to where we left off in the last recession, so we have some work ahead of us.

MODERATOR: Thank you. So, yes, if anyone has a follow-up on any of Dr. Kleinhenz’s remarks, please just let us know.

MR KLEINHENZ: Well, Katie, if there are further questions, they can —

MODERATOR: Yes.

MR KLEINHENZ: — flow through to you, and our communications team at the National Retail Federation are also available to help provide assistance.

MODERATOR: Yes, yes. We actually just – I got a question in the chat. So just – could you talk a little bit about the 2020 holiday season. You had mentioned it was better than expected. And just what kind of was the impetus for that, and what might be the effects of that? Thanks.

MR KLEINHENZ: Well, it seems so long ago in some ways, but it was a relatively strong season. Like I mentioned, we had about 8 percent growth. I’ll just identify some of the categories that we saw in terms of business lines that – on a year-over-year basis. There was like 22 percent growth in building and garden supplies. Now, people have been making home improvements in the United States, and a lot of spending is going on in making their life at home a little bit more comfortable because they’re working from home, their kids are going to school from home. That’s a large increase.

We saw food and beverage increasing like 10.8 percent on a year-over-year basis in December. Not surprising – this has been growing throughout the pandemic because people are not going out to eat, and so the holiday just picked up even further because people were trying to have a much more pleasant couple of weeks together to the best they could, maybe trying to do something even different than would have been traditionally at the holiday season because they’ve been suffering through the pandemic.

We had a lot of spending on sporting goods and hobbies. People were looking for games, they were looking for exercise equipment – a number of different products, again, for use at home.

The big issue that we saw during 2021 – 2020 – was the fact that e-commerce took off, and it was growing – it had grown at a pretty good pace throughout the year, but it was exceptional during the closing months of 2020 as people were trying to fill their holiday gift order online, finding the products. What was also interesting was that there was the slowdown that occurred with package delivery. Many families, many households ordered online and picked up at the store. So it wasn’t just pure e-commerce, it’s a combination of consumers attempting to find that gift item or that food item for the holidays. And that was a development that has been increasing in terms of the use of the digital economy. I think that it’s accelerated many households’ use of the internet to make – buying retail, and that’ll continue into 2021 and beyond.

I do think that it will not necessarily stay at this pace once we get back to normal. Consumers in the United States enjoy in-store opportunities. They’re still very interested in it from a social standpoint. They do want to see the product and they enjoy shopping, period. So I think that the level of spending on e-commerce will be above maybe the trend prior to the great – the pandemic, but I don’t think the growth rate will sustain itself. I think we’ll still be high, but it won’t be at the level that we had seen at the latter part of 2021.

MODERATOR: Thank you. Another topic that has come up with – in some of our briefings is – and someone asked this question before – would be coming out of the pandemic, do you see a lot of – do you see an interest in sort of sustainable retail or more perhaps – I guess the best way to put it – sustainable retail and maybe green retail, that kind of thing? Or would that – do you not anticipate that?

MR KLEINHENZ: Well, that’s a very good question. I’m not sure I have a great answer. We know that the green economy is getting a lot of people’s attention and it has been building for some time. We know certain demographics – more so the younger people, but now I think older people are learning that the green economy is important.

So I think my view is – and I’m not going to necessarily represent the National Retail Federation – I think it’s consistent, and it’s important, and it will continue to be important. And why? Because retailers want to respond to household needs. That’s why they’re in business. So if they’re not changing with the changes that are being asked of them, they’re not going to be successful.

So I think it’s going to be a matter of the pace of change, which I can’t give you any indication how much that’s going to happen, but it’s – it is obviously getting traction. A lot more concern about the environment and environment-friendly products. So my guess is that it’ll grow, and it can’t be all that bad for retail. I mean, I’m saying I think it’ll actually be a plus.

MODERATOR: Great. Well, I’ll just give everyone one more chance if they’d like to raise their hand.

QUESTION: (No response.)

MODERATOR: All right. Well, thank you again so much for your time today, sir. As I mentioned, this was an on-the-record briefing. Therefore, we’ll have a transcript for all the participants following the briefing. Again, I’d like to thank you for your time, and thanks to all of our participants for coming today, and that concludes our briefing.

MR KLEINHENZ: Thanks, Katie.

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