Enjoy a Healthy 2017 with Rising Employment, Confident Consumers

Rising employment, confident consumers drive economy

Businesses should enjoy a healthy 2017, thanks to more jobs, higher wages and continuing gains in housing and business investment

BY PHILLIP M. PERRY

2017_healthyeconomy Healthy 2017

For any business looking to enjoy a more profitable, healthy 2017, the economic stars are shifting into happy alignment. Major drivers of the economy—such as capital investment and housing construction—are expected to continue their modest but steady growth. And consumers should spend more money over the coming 12 months, thanks to increases in employment and wages.

“The economy should continue to strengthen in 2017,” says Kathryn Asher, associate economist in the research division of Moody’s Analytics, with headquarters in West Chester, Pennsylvania. “The job market is posting impressive gains, vehicle sales have never been stronger, home sales and house prices have largely recovered from the bust, and the stock market is hitting new highs.”

The numbers tell the tale. Over the next 12 months, economists expect a 2.9% increase in the gross domestic product (the total spending on goods and services by consumers and businesses). That’s above the U.S. economy’s historic norm of 2.5%. It’s also a healthy increase from the 2.6% growth of 2015 and the 1.6% growth expected when 2016 numbers finally are tallied. (The lower 2016 GDP rate resulted from two unanticipated forces: a larger-than-expected inventory correction and a slide in energy-related investment).

Growing employment

A healthy economy means higher employment. “The labor market expansion is in its seventh year, the longest uninterrupted period of job gains in recent history,” Asher says. That expansion is expected to continue, with unemployment decreasing to about 4.6% by the end of 2017, down from the 4.9% recorded in late 2016. (Many economists believe an economy is at “full employment” when the unemployment level dips to 4.7%).

Thanks to the improved employment picture, the nation finally is starting to see signs of a wage acceleration that will fuel additional consumer spending. “A number of large companies, such as Walmart, have announced increases in base pay,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics. “That suggests tighter labor markets and issues in obtaining sufficient workers. And that bodes well for wage growth.” Average hourly earnings are expected to grow by 3% in 2017, up from the 2.6% increase expected for 2016, which is itself a healthy rise from the 2.3% growth of the previous year.

Holding steady

Housing, a critical economic driver, is expected to continue to expand through 2017, albeit at a more moderate pace. Moody’s forecasts a 3.5% increase in housing starts in 2017, a de-escalation from the 9.7% for 2016. That was a slowdown from the 10.7% rate charted in 2015.

The inventory of available homes remains low as consumers continue to snap up the best deals. At the same time, constraints on mortgage credit availability are relaxing. “Lenders are increasingly comfortable extending credit to borrowers with lower scores and smaller down payments,” Asher says. “This is a result of the solid job market and consistently rising house prices, which are closing in on record highs nationwide.” Median prices of single-family homes are expected to rise some 3.8% in 2017, a slower pace than the 5% projected rise in 2016 and the 6.9% increase recorded in the previous year.

Additionally, federal agencies recently have clarified their regulations, so lenders have felt more comfortable extending credit. “Household formation is building and that benefits retailers,” says Walter Simson, principal of Chatham, New Jersey-based Ventor Consulting. “People with new homes need ‘new everything.’ ”

The de-escalation of housing starts is caused not by a decline in demand but by limitations of supply. “Residential construction has leveled off over the past year amid reports of skilled worker shortages,” Asher says. “There are other supply constraints, including buildable lots and credit access.”

Forward, but slowly

Thanks to the gradually improving economy, businesses are becoming more confident. “Business people have started to engage in longer term strategic planning,” Simson says. “This is a major change since the years following the Great Recession when companies were too depressed to even schedule meetings to plan for the future.”

Manufacturers, in particular, are looking toward 2017 more favorably after coming off a fairly modest year. “Our members are starting to see an increase in sales and are in the process of building inventories,” says Tom Palisin, executive director of The Manufacturers’ Association, a York, Pennsylvania-based regional employers’ organization with more than 370 member companies.

Specifically, the U.S. mattress industry is expected to see continued gains in both the dollar value and number of units shipped in 2017, according to the latest forecast from the International Sleep Products Association.

“Looking at 2017, home furnishings sales should benefit from the 7% gain in existing home sales and 4.8% increase in housing starts, both from 2016,” says Jerry Epperson, founder and managing director of Richmond, Virginia-based Mann, Armistead & Epperson Ltd. “Employment gains continue as do income gains, and mortgage rates are still below 4% for most of the year. The result is a recovery in mattress sales to 6% in dollars and 3.5% in units, both a lot better than this year. (For more about the ISPA forecast, see sidebar on page 132.)

Despite the better boardroom feelings, business investment, a key driver for the economy, is nothing to write home about. Many businesses burned by the Great Recession refrain from taking on too much risk. “Businesses are expanding steadily rather than aggressively, with an awareness that things could go bad again,” Simson says. “In many cases they are just playing catch-up for those investments they had deferred in prior years.”

Moody’s Analytics concurs that business investment remains a source of weakness, weighing heavily on overall growth. The reason? A profit picture that is darker than anticipated. “Corporate profits have had a poor run recently because of lower oil prices and appreciation of the U.S. dollar,” Asher says. Other factors include regulatory changes from the U.S. Department of Labor and overtime pay, as well as economic turmoil in Europe. Corporate profits fell 3% in 2015 and are forecast to drop another 3.5% when 2016 numbers finally are tallied.

Labor costs

Margins for larger employers may come under additional pressure as a tighter job market increases wages. “One of the biggest concerns remains the relative scarcity of skilled workers,” Palisin says. “About 10,000 baby boomers a day are leaving the workforce. The pressure is increasing to replace those individuals, but the pipeline is very thin. That, in turn, impacts growth prospects since companies are afraid they will not have the available talent for an upsurge in orders.”

Wage pressure further is increased by the ongoing trend toward reshoring, where companies bringing work back to the United States seek additional domestic workers. “For companies serving the North American market, reshoring can make a lot of sense,” Palisin says. “The goal is to improve quality by keeping production close to the research-and-development and engineering locations. Reshoring also is stimulated by a desire to reduce shipping costs and protect intellectual property. Too, increasing labor costs in China have made offshoring less attractive.”

Manufacturers also enjoy quicker delivery time with domestic production. “Companies would rather have a four-to-six week delivery of an item made here than a three-month delivery of something made overseas, even though the price might be lower,” Simson says.

To help solve the labor shortage problem, many companies more aggressively are pursuing internal training, launching apprenticeship programs to grow from the inside. But competition for the remaining workers remains a key driver of wage growth. “Manufacturers are having a hard time keeping this year’s worker with last year’s wages,” Simson says. “Many are going for higher quality workers, lower turnover and slightly higher wages.”

Rising labor costs, of course, sharpen the already keen desire to get the most benefit for each labor dollar invested. The need to maximize productivity has gained additional urgency with the recent changes in federal overtime law. “Increasing costs due to the recent reclassification of exempt workers has caused many employers to take a hard look at the productivity of individual employees,” Palisin says. “If the return is not there, then employers are reducing their workforces.”

For these reasons, labor costs will likely continue to pressure profit margins over the coming 12 months. “Corporate profit growth will remain modest in 2017 as we look for a 1.4% gain,” Asher says.

Healthy 2017

Retailers benefit

The improved economy should fuel more sales for retailers. “Our view is that 2017 looks better than 2016 for retail sales,” Hoyt says. Core retail sales are expected to increase by 5.4%, up from the mediocre 4.2% increase expected for 2016. (Core retail sales exclude volatile revenues from auto sales and gas stations.)

The healthy employment and housing sectors contribute to generally positive feelings overall. “Consumer confidence has remained remarkably stable over the last year and a half,” Hoyt says. That’s good for retailers, because confident consumers tend to be aggressive shoppers. And when they want to open their wallets wider, banks are cooperating. “An ongoing support for retailers is the increased availability of credit,” Hoyt says. “We are seeing an acceleration of credit card balance growth, and that is a positive sign.”

Retail results for 2016 were on the weak side of historic norms and were pretty much flat with 2015. Hoyt attributes the disappointing performance to deflationary pressures. “All indices of retail prices, not just energy, showed an unusual lack of pricing power in 2016,” he says. “We did not anticipate that a year ago.”

When deflation is factored out of the 2016 results, Hoyt says, the year’s retail sales increase is nearly a percentage point higher. And the deflation-adjusted increase for 2017 is expected to compare favorably with periods of healthy retail activity, such as the decade of the 1990s and the years just prior to the Great Recession.

No recession

What are the chances of a recession in the next 12 months? One easily can spot troubling signs, such as the pressures on corporate profitability. Another is the de-escalation of employment growth. “Job growth slowed in 2016 to an average pace of 182,000 per month, compared with 240,000 in 2014 and 2015,” Asher says. That moderation is expected to continue: “We expect the labor market recovery to persist, with monthly gains holding below 200,000, on average, over the next year, supported by a strengthening housing market and broad-based service growth.”

None of these factors, however, is expected to tip the nation into recession. Moody’s expects business investment to cease being a drag on growth during the year ahead as unanticipated excess inventories get back in line. “In addition, consumer spending will turn more supportive to investment in the next few quarters,” Asher says. “Stronger consumer spending bodes well for industrial production, and as capacity utilization increases, so too will the pressure on businesses to invest.”

Finally, the employment picture remains positive. “The moderation in job growth should not be alarming,” Asher says. “It is natural for this to occur as an expansion ages and the economy rapidly approaches full employment.”

Economists do not expect the economy to soften in the foreseeable future. “While job growth will slow, we don’t expect the economy to fall into a recession soon,” Asher says. “Odds are that the current expansion, which is already one of the longest, has a way to run.” 

Mattress industry forecast: ISPA expects gains in 2016, 2017 and 2018

The U.S. mattress industry is projected to enjoy healthy gains in both units shipped and the value of those shipments for this year and the coming two years, according to a new forecast from the International Sleep Products Association.

The forecast, released in October, predicts that the number of mattresses and foundations shipped in 2016 will rise 0.5% and the wholesale dollar value of those shipments will increase 3%. For 2017, the forecast shows a 3.5% increase in units shipped and a 6% increase in the value of those shipments. In 2018, the number of units shipped is expected to rise 3%, with a 5.5% increase in their value forecast.

The forecast for the U.S. bedding industry generally is issued twice a year, depending on market conditions. It is based in part on an economic analysis prepared by the University of Michigan, with input from the ISPA Statistics Committee, and uses an econometric model of the mattress industry linked with the larger home furnishings market and national economy.

The forecast also contains economic and market analyses by Jerry Epperson, founder and managing director of Richmond, Virginia-based Mann, Armistead & Epperson Ltd., and Ashraf Abdul Mohsen of Association Research Inc. in Gaithersburg, Maryland.

For more information about the forecasting process, check SleepProducts.org and click on the “Industry Statistics” tab.

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