California Apparel News

As the economists putting out the UCLA Anderson Forecast were writing their quarterly report released on June 5, the Trump administration had not yet announced its 5 percent tariff on all Mexican goods being imported into the country.

This new tariff will only add more sand to the gears of commerce, said David Shulman, a senior economist with the forecast. “It makes it much worse,” Shulman said, explaining that the tariff is a tax on the American consumer, who will be buying less if prices go up.

Already, there is a 10 percent additional tariff on $200 billion worth of Chinese goods coming into the United States. After June 15, this will be upped to 25 percent on top of already existing tariffs on goods from China.

Additionally, the Trump administration has threatened to impose additional tariffs on all goods being imported from China, which would include apparel and footwear.

“If we didn’t have all this tariff stuff going on with Mexico, more people might be going to Mexico to produce their goods now that there are tariffs on Chinese imports,” Shulman said.

Tariffs are just one of the factors that will lead to slower economic growth in the United States in the next few years. Other ingredients affecting the mix are slower job growth and a lukewarm real-estate market. The UCLA Anderson Forecast is now predicting that the gross domestic product will rise only 2.1 percent this year compared to 3.1 percent in 2018 and taper off to 1.4 percent in 2020.

Shulman noted that when the economy slows to 1 percent growth, the risk of a recession becomes very real, with the second half of 2020 being problematic. “The stock market is worried about a recession sooner than later,” the UCLA economist said.

As the economy slows, job growth diminishes. The UCLA Anderson Forecast foresees job creation going from 220,000 jobs a month ending in April to about 130,000 jobs a month in the second half of this year and about 50,000 new jobs a month in 2020.

“It appears that the [national] unemployment rate will bottom out at April’s 3.6 percent level and remain there for about a year before rising to 4 percent in late 2020 or early 2021,” the report said.

While unemployment remains relatively low, so are interest rates. The Federal Reserve is on track to hold interest rates at their current level of 2.375 percent until the middle of 2020, when it is expected to cut rates by one-half percent as the Fed responds to a slowing economy.

Steady interest rates are benefiting the housing industry with more apartments being built as younger consumers put off marriage and flock to urban areas where job growth is more vigorous.

In 2018, there were 375,000 multifamily units started. While that will dip to 355,000 units in 2019, it should be up to 400,000 units in 2021.

But, since 2016, individual home building has been locked in at a level that is considered below normal. On average, there are about 1.4 million to 1.5 million housing starts a year in the country. Over the last three years, housing starts have been at about 1.2 million.

Real-estate sectors not doing well include offices and retail. Currently, the national office vacancy rate stands at 16.6 percent, only modestly below the highs reached in the previous cycle and well below the 8 percent achieved in 2001.

The real driver in office vacancies can be attributed to offices occupying less space as the amount of square footage allotted to each employee declines. In years past, one employee was allotted on average 200 to 250 square feet of space. That has shrunk to around 150 square feet per employee.

Part of this is from the rapid growth of coworking spaces developed by companies such as WeWork. The UCLA Anderson Forecast said coworking tenants have accounted for one-third of all the office leasing in the United States for the 18-month period ending December 2018.

Because of this, short-term leases will become the normal way of doing business as companies look for more flexibility.

On the retail front, the real-estate industry is really taking a beating. This year alone, there were 5,994 store closings and 2,641 store openings, the UCLA Anderson Forecast said.

The culprit here is e-commerce, which isn’t being helped by Amazon’s recent announcement it will have one-day delivery available to Amazon Prime customers. “E-commerce’s share of total retail spending has advanced from 0.6 percent in the fourth quarter of 1999 to just under 10 percent in the fourth quarter of 2018,” the economic forecast said.

Consequently, regional mall and shopping-center vacancy rates have remained at recession levels, standing at 9.3 percent and 10.2 percent respectively at a time when the economy is strong.

“The reason you see so much food service in malls now is there is little competition from e-commerce,” Shulman said.

California cooling

Just as the national economy will downshift, so will California’s economy.

California’s job growth is slowing primarily due to the fact that it is getting harder to find qualified new employees.

Currently, the state unemployment rate stands at 4.3 percent. That should hold fairly steady, inching up to 4.4 percent in 2020 and then rise to 4.6 percent by early 2021, wrote Jerry Nickelsburg, director of the UCLA Anderson Forecast.

Job expansion in California has been across most sectors—with growth in professional services, information, and scientific and technical services—but there has been less robust activity for nondurable goods such as apparel and retail.

Real personal-income growth in the state is forecast to grow 2.9 percent this year, 1.9 percent in 2020 and 2.1 percent in 2021, the forecast said.

Home sales in the state are behind what they were last year. In April, single-family-home sales were off by 4.8 percent over the same month last year, and condo sales were down 3.8 percent during the same period.

Housing prices were declining but have reversed their slide with the exception of the San Francisco Bay Area.

Still, builders are cautious at the moment. The number of permits issued during the three months ending April 2019 dipped 20.5 percent from last year.