May Jobs Surge But Tariffs and Industry Transformation Could Dent Employment Picture

By Steven Levine

Sears Set to Close More Than 70 Stores

While the current US employment landscape looks rosy, recent global trade-related activity, as well as certain industry transformations, appear to be posing threats to the labor market – and consequently, the retail growth picture.

US President Donald Trump’s administration decided Thursday to impose tariffs of 25% on steel and 10% on aluminum imports from Canada, Mexico, and the EU, citing national security concerns, as well as to protect employment levels in the domestic metals industry.

The move follows an announcement earlier this week from the White House that it would proceed with its decision to levy 25% tariffs on roughly US$50bn worth of imported Chinese goods.

A recent study by the National Retail Federation (NRF) and the Consumer Technology Association found the Trump administration’s imposition of tariffs on Chinese imports would ultimately reduce US GDP by nearly US$3bn and “destroy” 134k American jobs.

NRF CEO Matthew Shay warned the US’s decision to levy the tariffs will lead to higher costs for consumers, fewer jobs and retaliation.

The NRF had previously said the underpinnings of the US economy – including job growth, unemployment, and GDP – led it to think that retail industry sales would grow between 3.8% to 4.4% year-over-year in 2018. Online and other non-store sales, which are included in the overall number, were expected to increase between 10% and 12%, respectively. The numbers excluded automobiles, gasoline stations and restaurants.

Economic improvements

Meanwhile, consumer confidence, spending and retail sales growth have generally been supported by ongoing tightening in the labor market.

“Recent economic data, especially on the labor market, along with the appreciation in financial assets in 2017 justify high marks for consumers’ assessment of current conditions,” said Jefferies senior money market economist Thomas Simons. However, upside potential in the outlook index is “somewhat limited at this point in the cycle,” as the labor market is near full employment, stocks have been “bouncing against record highs, and the economy has been growing above potential.”

Although further improvement may be limited, the employment situation for May indicated the labor landscape continues to tighten.

Total nonfarm payroll employment rose by 223k in May, and the unemployment rate edged down to 3.8%, according to the US Bureau of Labor Statistics. Employment continued to trend up in several industries, including retail trade, health care, and construction. Average hourly earnings also rose to 2.7% year-on-year, better than anticipated.

Analysts generally expected the jobs report to show 190k nonfarm payrolls were added after April’s lackluster headline reading of 168k, with the unemployment rate to remain unchanged at 3.9%.

Following the news, the yield on the 10-year US Treasury note climbed to around 2.926% from 2.902% just prior to the release of the report.

Retail industry transformation

While the NRF anticipates lower US GDP and an increase in job losses as a result of the US’s decision to impose tariffs on Chinese imports, systemic changes in the retail industry are also likely to spur higher unemployment numbers.

While some iconic US companies, such as Walmart (WMT), as well as the 160-year-old retailer Macy’s (M), have seen recent success with their blended in-store and on-line shopping strategies, other firms, including Toys ‘R’ Us, JC Penney (JCP) and Sears (SHLD) have struggled.

As part of its first quarter of 2018 earnings results, Sears’ management, for example, said it will close 72 of its estimated 100 non-profitable stores, amid ongoing operational streamlining efforts.

Sears chair and CEO Edward Lampert said his company – originally founded in 1886 – is also exploring third-party partnerships involving several of its businesses, including Sears Home Services, Innovel, Kenmore and DieHard, as well as “gaining further momentum around our new smaller store formats that blend brick and mortar and online experiences.”

Sears posted a net loss in Q1’18 of US$424m compared to net income of US$245m in the same year-ago quarter. The Q1’17 figure included a gain of US$492m from its sale of the Craftsman brand. Adjusted EBITDA also continued on a negative track, down US$5m year-on-year to -US$225m.

By the early afternoon New York trading session Thursday, shares of Sears plunged more than 11% to about US$2.85 and has fallen over 70.3% since July 2017. The stock hit a low of US$2.07 in February.

Tightening in some of Sears’ 5-year CDS levels, however, indicated the market’s perception of the firm’s creditworthiness is likely to improve, while other retailers fell into negative territory.

Recent quotes on 5-year CDS spreads on certain retail-related firms:

Tangible vs technological

Technological advances have generally reshaped consumers’ behaviors, forcing traditional brick and mortar shops to compete with the growing popularity of internet-based firms.

Analysts at advisory services firm Deloitte noted that emerging technologies, such as social commerce, facial recognition for e-commerce point of sale, virtual reality and the Internet of Things (IoT), “promise to transform the customer retail experience like never before.”

Deloitte added: “Dramatic revamping of demand and supply chain strategies is a key lever to pull—especially when adjustments are required to support new business models or innovation initiatives.”

Overall, while internet-based companies continue to see strength, traditional stores appear to be putting up a good fight.

A recent fall in the value of the Amplify Online Retail ETF (IBUY), which focuses on online shopping firms, against the SPDR S&P Retail ETF (XRT), which mainly invests in traditional shops, may indicate a mild resurgence of the in-store shopping experience.

Technology has also disrupted several other industries, including health care, telecommunications, and media, as changes have triggered a wave of massive consolidation.