ECONOMISTS PAINT GOOD PICTURE FOR 1998

JENNIFER OWENS

WASHINGTON (FNS) -- For retailers, the good news and the bad news this year could be one and the same: Real wages have been rising faster in the past year than at any time since 1972. For the good news, that means combined with low inflation and a high-flying stock market, consumers not only feel wealthier, they actually are wealthier. And, economists point out, these consumers are spending -- on vacations, new homes, and even apparel. In fact, they're spending on just about everything but new cars.

"This looks like a good consumer year," said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University. "Right now the consumer is responding. People are spending down some of their stock gains."

"Consumer spending should be strong this year," agreed Sandra Shaber, an economist with the WEFA Group in Philadelphia.

"Everything looks good. Unemployment is low, finally wages are rising, inflation is low. What's not to like?"

"There is certainly a lot of money to be spent," said Susan Hering, chief economist for Indosuez Barr Futures, a securities-trading firm in Chicago. "So it's a very positive environment."

But now for the bad news: Much of that positive environment is due to record unemployment rates -- now hovering at 4.75%, the lowest sustained rate since the 1960s -- which have heightened competition for workers in all sectors. And among retailers, increasing labor shortages have resulted in faster hourly wage gains for employees. Consumer inflation has generally been running below 2%.

Not all economists agree, however, that labor shortages are a big concern for retailers. Hering, for example, said that while the labor market is tightening in every sector, "retailers may have done better than high-tech employers." She said that's because low unemployment rates have encouraged more low-skilled people to attempt to find a job in the easy economy -- and they are succeeding.

"They can be retail clerks," she said. "So it may not be as tough for retailers as other sectors of the economy."

Carl Steidtmann, chief economist and director of research for Management Horizons in New York City, said, however, that while recent welfare-reform changes have also helped move more low-skilled workers into the labor market, these new workers still require additional training -- something that retailers have traditionally been loathe to provide. Steidtmann agreed that retail wages are rising. And he added, "I think the big concern is another hike in the minimum wages, which is on [Clinton's] table."

Wages are rising as retailers continue to feel more pressure on their prices, with deflation appearing in some sectors.

"Just about everything looks great for the consumer," said Ira Silver, chief economist for J.C. Penney Co. "It's the companies that are getting squeezed without being able to raise prices. I think it's a symptom of an overstored situation. I think retailers are going to continue to have problems."

Shaber said that consumers will be buying more this year, especially as more low-income consumers increase their earnings. But while discount retailers may see a boost from this income growth, she cautioned, "nobody is going to benefit from this automatically."

Said Shaber, "Tight labor markets have started to drive up wages for low-income workers, so we're starting to find more income filling into the low- and middle-income levels." But while more consumers may now have more purchasing power, they also have more ways to spend it.

"Retailers have got to find a way to get people in the door," she said. "There isn't any retailer that can rest on their laurels."

"I think consumer spending tends to go in spits and bursts," said Hering. Nevertheless, she said, her forecast shows those spits and bursts moving "on an up trend" throughout the rest of the year. Hering predicted, though, that retail sales in the second quarter will likely show some softening as a payback for the first-quarter's warm-weather boost. Meanwhile, she said, the economy's growth -- now in its seventh straight year -- should slow from its robust 3.78% pace in the fourth quarter to 2.5% to 3% during 1998's second half.

J.C. Penney's Silver said he also expects the nation's economy will slow, to about 2% or less during the second half. The slowdown will be due primarily, he said, to either the Federal Reserve finally raising its benchmark overnight interest rate after more than year at 5.5%, or to the flood of cheaper imports from the economically troubled Southeast Asia.

While Silver said the true impact of Southeast Asia's currency devaluation turmoil probably won't hit domestic shores until later this year, he already believes the help on retailer margins won't last long. "There's going to be some period, I don't know how long it's going to be, that the lower prices are not going to be passed along to the consumer. But someone is going to break," he said.

Hering agreed that competition will make holding onto a larger margin difficult for many retailers. "Whether retailers are successful [at holding to larger margins] when there's so much demand for the same customer base remains to be seen," she said.

Meanwhile, at the Economic Forecasting Center, Ratajczak said he expects the first quarter will show consumer spending maintaining the same 2.5% growth that capped off 1997.Ratajczak noted that while consumer debt is still increasing, it's at a slower pace than last year, about one and a half times the rate of consumer disposable income growth so far this year, compared with twice as fast in 1997. He said he also expects the nation's economic growth to slow during the second half, to 2.5%.