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RetailINTEL Economic Brief: Mid-2018 | Tariffs and Taxes and Trade Wars, oh my!

Updated: Sep 30, 2023

RetailINTEL reports help retail organizations, and companies supporting the retail industry, to better understand important emerging economic and consumer trends impacting their businesses.

Gathering storm clouds are beginning to cast shadows on what has been a recent fairly-positive economic period, with a bull-market for stocks that has lasted nine years, the third longest stock market upswing in history, and produced a gain of around 200 percent to date—rebuilding much of its recessionary loss of around $15 trillion. Retail Intel uses the term “fairly-positive,” because the economic recovery, while dramatic overall, has not lifted all boats. Stock market gains have been highly concentrated and dominated by large technology stocks. Just five companies: Apple, Amazon, Alphabet, Microsoft and Facebook make up more than 15 percent of the S&P and account for more than one-third of the $2.7 trillion increase in value in the past 12 months. Those who were not invested in these technology companies, and a few select other sectors, probably did not do as well.

Additionally, the number of Americans invested in stocks has fallen precipitously, from 65 percent in 2008 to 50 percent today, including 401k accounts. It is the wealthy, the greatest share of stock holders, who have profited the most in the recovery, and it is the wealthy who will benefit the most from the recent tax changes. In the meanwhile, it took nearly six years into the recovery for the average 401k account to begin to recover from its losses, and it was 2014 before the price of a home owned by an average American began to significantly recover from the catastrophic close-to 35 percent drop in housing prices that hit the country during the Great Recession of 2007-2009.

Of concern now, there are threats of global trade wars and rising import tariffs. We are already seeing rising prices on imported steel and aluminum, and on U.S. made steel and aluminum which have had already price increases of 33 percent and 11 percent, respectively, and which directly affect construction and auto production. The 20 percent tariff instated last year on lumber from Canada has pushed lumber prices to record highs, adding an average of $9,000 to builders’ costs per new home. The EU began imposing $3.3 trillion in tariffs on U.S. goods, in July, and tariffs on $50 billion in Chinese goods coming into this country went into effect in mid-June, with additional Chinese tariffs waiting in the wings. There is also worrisome financial instability in emerging markets, which is producing more economic turbulence than seen in many years for that sector.

In the U.S., combine all of this with the highest mortgage interest rates in 7 years, the highest annual increases in consumer goods prices since 2012, and rising inflation that is eroding income increases for working-class Americans that might have come with the recent tax changes (according to the Labor Bureau, the CPI reflected inflation of 2.9 percent in June), and Americans may be looking at a host of new economic challenges.

Americans to pay $38 billion more for gasoline in 2018

Rising prices for oil and gasoline are of particular concern. Oil is at its highest price since 2014, with Brent Crude peaking at more than $80 a barrel earlier this year. Morgan Stanley estimates that with an average price of $2.96 a gallon in the U.S., gasoline will cost consumers an additional $38 billion in 2018—taking that amount away from consumer spending for other goods and services. Some analysts expect gasoline to reach an average of more than $3.00 a gallon by year-end, and in some regions of California, a gallon is already $4.00 or more. Crude oil prices are of particular concern, as oil price spikes usually coincide with recessions, as happened in 1980, 1990, 2001 and during the Great Recession of 2007/2009. Oil prices aren’t just about cars and driving, all freight movement and transportation is affected as well, and many manufactured products include petroleum components. Jet-fuel prices have increased by 50 percent in the past 12 months, and we are already seeing increases in airline ticket prices, plus additional surcharges. By the fall/winter holiday season, ticket prices could have increased by 20 percent or more.

Price mayhem at the supermarket

Traditional grocers are roiling in confusion, facing a trifecta of challenges: 1) the entry of online retail giant Amazon into the food sector, with its purchase of Whole Foods Market, 2) pressures on grocers to enhance their online efforts in order to appease today’s shoppers and to better compete with Wal-Mart‘s expanding online presence, and 3) the invasion of European super-discount grocery chain Aldi, who is rapidly building its U.S. network. Factor in the changing shopping habits of the younger generation of Millennials—who cook less, snack and eat out more, and prefer smaller craft-based food producers to giant supermarkets—and Publix, Kroger and the like, may have to rethink their businesses.

If that isn’t enough, grocers complain that they must now raise prices because their input prices (costs to acquire goods and deliver them to the point of sale) are outstripping their output prices, or the prices shoppers pay. Tyson’s Foods, for example, says it will pay $250 million more for input costs this year. (It should be noted, however, that over the past two to three years, as gasoline prices came down from unprecedented high levels, most grocers who had increased their prices, did little to re-adjust prices back downward as gas prices fell.) Currently, large consumer packaged goods companies—Kraft, Heinz, Campbell Soups, P&G and Smucker Company—all say they are in the process of initiating price increase programs this year. (Interesting enough, Smuckers’ largest price increases to date have been within its pet food division, where consumers seem willing to pay whatever it takes to keep Fido and Fluffy happy.)

Some of the most notable price increases at grocery stores in 2018 include an increase of around 16 percent for bananas and an increase of 37 percent for eggs, bringing both to record highs. The preference for “fresh” foods vs. processed and packaged foods, led by Millennials, has driven up prices for produce and prepared take-out menu items. Shoppers are now paying around $1 each for single item fruits, such as apples, oranges, peaches, etc., with the per pound price for tomatoes rising to $2.50 or even higher at many main-stream supermarkets. Farm stands and farmer’s markets, historically where farmers sold surplus crops cheaply, have become more like upscale food boutiques, often charging as much or more than grocery stores—organic or not. Even coffee chains are pumping up the price; Starbucks just announced it is taking the price of a cup of its 12-ounce brewed coffee from $1.95 to $2.15. And The Coca Cola Company has said it will raise the price of its beverages before year-end, in part due to rising costs of aluminum cans due to tariffs.

What things cost: an historical perspective

Here is a list of good and services that have increased the most in price from the end of the recession in 2009 to 2017:

  • Consumer banking services

  • Investment and portfolio/money management services

  • Tobacco

  • Higher education

  • Prescription drugs

  • Gasoline (Note: does not include 2018 price increases)

  • Housing

  • Hospital services

  • Beer

  • Pork

  • Automobiles/Vehicles

  • Sugar and sugar-based products

  • Eggs

Source: Bloomberg Businessweek, March 2018

The measure of inflation based on the CPI, or a designated market basket of consumer goods, does not give sufficient consideration to the service sector, where financial services, education and hospital care, for example, as indicated by this list, have shown some of the greatest price increases. Much of the government’s fiscal budgetary planning is based heavily on the inflation rate—for example, the Social Security COLA, or annual cost of living adjustment for retirees. In the early part of the twentieth century, when many government programs came into existence, service sector fees were low in comparison to the cost of most manufactured goods, but now, prices in many of the service sectors are outstripping goods in terms of rising prices.

To get an idea of how fast prices have been rising, consider this: according to Kelly Blue Book, in January 2018, the average transaction price of a new car or light truck was $36,270, an increase of $500 from late 2017. The Toyota company said that pending new tariffs could add $200 more to the cost of every vehicle this year—"a $3.4 billion tax on the U.S. consumer.” At the same time, the average rate for a five-year auto loan in June rose to 4.71 percent, the highest level since 2012.

Indeed, the Fed’s raising of interest rates—there have been five rate increases so far, since the Fed started increasing rates—is imposing forced price increases on many Americans. Credit card interest has hit the highest level in 10 years, increasing monthly minimum payments and lengthening the time it takes to pay off the debt. And so far in 2018, the increase in mortgage interest for new home loans is adding around $100 a month to a standard mortgage payment for an average-price home, with a 20 percent down payment.

In June, the government approved a new law allowing states to expand the collection of sales taxes to all Internet sellers. Most online retailers have previously been exempted from collecting state sales tax, and an offer of “no sales tax and free shipping” has long been a major attractor for many online shoppers. (Note that already voluntarily pays state sales tax on goods it sells directly.) Adding sales tax to all online purchases will amount to a costlier tab for Internet shoppers and especially for smaller online businesses, though the NRF points out, it will bring a “more level playing field to online sellers vs. brick and mortar stores.”

The cost of living in some cities and regions is rising faster than in others. According to government data, in 2017, the No. 1 city for the steepest rise in the cost of living was Atlanta, followed by No. 2: Denver, and No.3: Seattle.

Birth dearth a factor

Demographics play a key role in a healthy economy, so it is not good news that in 2017, the U.S. birth rate dropped to the lowest level in 30 years—since 1987. Most of this decline is attributed to Millennials’ delaying both marriage and starting their families. We are seeing significant numbers of Millennials still living at home with their parents, well into their mid-thirties. The share of young men living at home, ages 24-34, actually rose to close to 20 percent last year, the highest percentage since record keeping began in 1960. For young women in that age group, 12.6 percent still live in their parents’ homes (source: U.S. Census Bureau). As a result, the homeownership rate for young adults under age 35 fell from 42 percent in 2007 to 35 percent in 2017.

Retail Intel, talked about the impact of the birth decline on the retail industry in a quarterly report last year, noting that retailers targeting children should be aware of this trend and cautious of business expansion until births start to increase. Of all the retail analysts who have opined about the recent demise of Toys R Us—in bankruptcy and liquidating all units—not one has mentioned the demographic decline as a factor, while focusing on mismanagement and online competition. But demographics are destiny, and those who swim against the demographic stream risk fighting a losing battle. As mentioned in the Retail Intel mid-2017 report: in the 1960s, during another period of birth rate decline, many department stores closed their children’s departments, reopening them years later when the birth rate improved.

Housing: impressive gains for many

While most of the $9 trillion that was lost when housing prices fell during the Great Recession has been regained on a nationwide average basis, just 34.2 percent of homes nationwide have seen their values surpass their pre-recessionary peaks, which occurred in late 2006. In addition to that, according to real estate company Trulia, price recovery is widely diversified, ranging from 94 percent above peak price in cities like San Francisco—where home prices have increased by 60 percent in just the past few years—as well as in Denver, Seattle, several cities in Southern California including Los Angeles, Oklahoma City, Wichita, Nashville, Fort Worth and Dallas. Cities with the least increase in home values above the pre-recession peak price include Las Vegas, Tucson, Fresno, and Camden (N.J.), Fort Lauderdale, New Haven (CT), Cleveland, Pittsburg, Indianapolis and Cincinnati, where increases have measured only around 3 percent over peak. More than half of the largest housing markets have regained all or most of their value, with a nationwide average gain of $55,200 per home. The highest gain in post-recessionary value is in San Jose, California, with a price increase of 110.5 percent and a current average home price of $615,100.

The increase in home equity in many regions has added to household net worth and helped to restore consumer confidence. (The median household’s net worth dropped by 40 percent between 2007 and 2013.) Indeed, home equity loans and lines of credit (HELOCs) are beginning to put extra disposable dollars into some shoppers’ pockets. Prior to the real estate collapse, consumers experienced what was called a “wealth effect,” as they spent HELOC money as they pleased, throughout the economy, contributing to an unprecedented economic boom. But if borrowers, under the new tax law changes, want to claim a tax deduction for a HELOC, they can only use the money for home improvements. Tax changes limiting deductions for mortgage interest and local property taxes to an annual total of $10,000, are expected to have a negative impact on sales of more expensive homes in certain areas of the country.

In the post-recessionary landscape, fewer Americans own homes. The Home Ownership rate has fallen to the lowest level since the Census Bureau began tracking the rate in 1965. In 2017, the ownership rate was 63.9 percent, down from 69.2 percent in 2004. Many Millennials [those not still living with their parents] have preferred renting to owning over the past few years, and Millennials’ attitudes toward owning are different that past generations. While Boomers were happy to start out with “starter homes”—usually small, two-bedroom/one bath bungalows, in need of fixing up; todays’ young adults are more inclined to expect their first home to be more similar to their parents’ home, where they grew up—a difference of thousands, and sometimes hundreds of thousands, of dollars. Aligning financial assets with expectations, amid a shortage of homes for sale and rising prices, has delayed Millennial home buying, as has their unwillingness to take on debt—beyond the $3 trillion-plus they already owe on student loans.

Working hard for the money

At 3.8 percent, the jobless rate is at a 17-year low. An American who wants a job has the best chance of getting one in many years. Unfortunately, for many, that job may not be one with good pay or opportunities for career advancement. Much of the job growth has been in the lower-paying sectors: hospitality, food service, retail sales, retail logistics/warehouse and distribution centers, delivery, marketing call centers, maintenance and custodial and the like. Amazon hires hundreds of thousands of employees each year, many of them seasonally, but most of those hires spend their days filling orders and packing and unpacking cardboard boxes, in giant anonymous warehouses—hardly the career path most Americans dream of.

State governments and some companies have raised wages over the past few years. In many states, the minimum hourly wage has been increased to $10 or more, from the current Federally mandated $7.25 an hour minimum, which has not increased in 10 years. And many national retail chains, including Wal-Mart, Starbucks, McDonald’s, Costco, and others, have voluntarily made adjustments for their workers.

Indeed, most wage increases have happened at the lower-end and the higher-end of the employment scale, with salaries for jobs in the middle remaining somewhat stagnant. At the upper end, for example, according to the Wall Street Journal, newly-hired lawyers for large firms saw their starting salary increase to $190,000 this year, a jump from $160,000. In Silicon Valley and other tech enclaves, a starting salary of between $100,000 and $150,00 produces a yawn these days. Among a recent list of the top 20 most popular jobs for recent college graduates, across a range of professions (including many positions in tech and health care), only a couple jobs paid less for a starting salary than $50,000 to $60,000, with some paying around $80,000. A recently as five years ago, some of these same jobs started at $35,000 to $40,000. A Wall Street Journal survey of S&P companies with the highest median-employee pay, surprisingly found that pharmaceutical companies paid the highest, from $200,000 to $253,000. Face Book was also identified as having a median pay of more than $200,000.

The share of Americans who are working or who want to work fell from a peak of 67.3 percent in 2000 to 60.1 percent at the end of 2017. Meanwhile, many employers are finding it difficult to locate new hires. Influencing factors include: 1) a mismatch of skills, especially for companies who use proprietary technologies or specialized IT systems, 2) Boomers leaving the workforce, 3) low salaries that are unattractive for many, 4) the high cost of child care, and 5) the inability of many workers to pass a pre-employment drug test—attributed to the “Opioid epidemic” and the increasing popularity of marijuana. (As marijuana is becoming legal in many states, some employers are beginning to drop marijuana testing.) An interesting factoid: there are now more stores selling marijuana in Colorado than there are Starbucks.

It has also become more difficult to get a true picture of U.S. employment, as many workers have voluntarily dropped out of the workplace, the labor rate for women has fallen, and it is uncertain how millions of workers now in the huge “Gig” economy—Uber, Lyft, TaskRabbit, Takl, and the like—and who are dependent on shifting market demand to determine how many hours they are able to work in a week, are counted.

2018 will be a year of increasing financial pressures and uncertainty. In coming months, retailers should pay close attention to:

Trade Wars: The average person or business does not know how to evaluate the of threat of tariffs that could result from trade wars and whether trade wars mentioned on the news are a real threat or are just “political posturing.” The air of financial uncertainty may have a negative effect on the business climate for the remainder of this year and possibly into next year, if unresolved, and will make business planning difficult and riskier. According to the National Retail Federation (NRF): “Tariffs on an additional $100 million of Chinese imports would bring the total impact to a $49 billion reduction in GDP and the loss of 455,000 jobs.”

Consumer Price Increases: We may be facing a potential tsunami of price increases, not just from trade tariffs, but also from American businesses’ increasing prices to cover rising input costs and to boost profitability. If all these price increases hit at once, lower- and middle-class consumers could be inundated—and it could sink the economy—unless accompanied by a wide-spread corresponding increase in incomes.

Increasing interest rates: The Federal Reserve has stated its intent to raise interest rates further in 2018. This could at some point, discourage home and car purchases and could trigger a rise in credit-card and adjustable-rate mortgage defaults. For businesses, rising interest rates could mean an end to the era of “cheap money” business loans at close to zero percent interest that have been a catalyst to expansion for a decade.

The Stock Market: Stocks do not like uncertainty, and volatility is increasing. Additionally, in many respects, the tech sector, which has led the Market, may have matured or reached a plateau. There may be some challenges and delays, as the next round of mainstream tech products work their way into the market; for example, Tesla’s recent problems with its autonomous driving crash-avoidance systems, lithium ion batteries catching fire, and the like. Home digital management products, such as Alexa, have inadvertently sent private messages and are turning out to be easy to hack. Apple is experiencing a slowdown in sales in this country, as its newest generation of iPhones seem to have little more to offer in the way of innovation—baby steps instead of leaps, like in the past. In the U.S., mobile phone devices may already be a mature or post-peak market. Additionally, some social media sites may already be post-peak. According to Pew Research Center, Facebook usage among teens is in decline, with only 51 percent currently using Facebook—down from 71 percent three years ago—and only 10 percent of teens say Facebook is their most-used online platform, preferring instead, Snapchat, YouTube and Instagram (the latter is owned by Facebook). Obviously, there is still money to be made from investing in technology, but going forward, opportunities should be scrutinized carefully and timing will be critical.

Millennials: So far, as consumers, Millennials have been a big disappointment, delaying buying homes, buying cars and bearing children. If they begin “adulting” [their word for acting like an adult] soon, it could create a new boom in consumption; but if Millennials continue on their present track for much longer, we could be seeing a huge missed opportunity for retail—and Millennials could be in danger of missing their moment. Some retailers and marketers are considering giving up on Millennials and just moving on to Gen-Z.

Last thoughts:

There is a “However------."

If we can avoid all-out retaliatory trade wars, keep price increases from hitting the stratosphere (the price at the gasoline pump is key); initiate wage increases for more middle-class Americans; and get Millennials to start getting married, buying homes and having kids; there is a good chance for the current economic expansion to continue.

Much of the past decade has been spent playing catch up, getting back [economically] to where we were before the Great Recession. Our GDP growth still isn’t there, but most of the country, on average, has now regained much of the ground that was lost. Home values have seen large gains, especially in many urban areas. The jobless rate is at an all-time low, with some employees enjoying increases in pay. There has been an abundance of new technological products to buoy consumer markets, and online shopping offers a never-before abundance of convenience and choice. Companies, including Amazon and Apple for example, have experienced unprecedented growth and most investor stock portfolios are healthy again, or at least healthier. America’s banks are better prepared to weather another financial storm. But part of that bottom line is that we are also living in a more complex environment—politically, culturally and economically—with more uncertainty and risk. And more emotion: people are reacting more strongly and personally to almost everything these days, revealed through public outbursts of anger and fear. Retailers need to emphasize reducing stress, making things simpler; providing financial alternatives (especially for Millennials); helping consumers solve problems; and creating a more relaxed, engaging and personalized shopping experience, whether in stores or online.

Real stores need to become sanctuaries of safety, sensuality, exceptional customer service, and with better selections than online. With online covering the basics and selections that are what merchants call “narrow and deep”—as catalogues have in the past—stores can become havens of originality and creativity; presenting what is novel and unique, of better quality, edited to a more demanding taste level and with a stylistic point of view.

Report by: RoxAnna A. Sway, RDI

Retail Intel, Director

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