Profit Margins Slipping, Labor Market Cooling, A Downturn Coming? 19 September 2023

KEY POINTS

• The apparel industry has winners and losers, with the former crediting solid products/marketing while the latter blames economic uncertainty
• Consumer spending is still OK, but the economic outlook isn’t looking too rosy
• Data indicates expectations of a downturn by year-end are gaining traction; be prepared for anything

The overall economic outlook looks a little rosier despite recent ebbs and flows, including the aftermath of Hurricane Hilary and Idalia. The Federal Reserve’s decision not to implement a rate hike this month may also be another factor that could hopefully see further improvements to the economy, including the apparel decoration industry.

Let’s have a look at what to expect going forward.

Apparel Industry Still Fluctuating

Per our previous issue, some apparel companies are doing better than others. The general trend is that those with poorer sales blame it on consumer uncertainty, while those performing well attribute it to having great and innovative products or a solid sales and marketing strategy.

Urban Outfitters, Inc. is one company that’s doing well for itself despite the underperformance of the Urban Outfitters brand in North America. To make up for that, four of their five brands “posted record second quarter revenues;” they attribute this to consumers valuing “fashion over price.” They remain optimistic about stronger overall consumer demand to help push up sales in the third quarter of 2023.

The G-III Apparel Group also feels good about its performance with “another strong quarter well exceeding [their] top and bottom-line guidance.” G-III echoed Urban Outfitter’s sentiments that consumers are willing to pay for good fashion:

“If you design it appropriately, put the right quality into it, present it appropriately, the consumer is willing to pay.”

Morris Goldfarb, Chairman and CEO, G-III Apparel Group, Ltd.

Lululemon is also recording decent sales performance despite a weaker activewear segment in the US. Lululemon attributes its success to product innovation, especially with its Everywhere Belt Bags brand.

Speaking of which, activewear’s waning popularity continued into recent months (as reported in our last article). In fact, Under Armour, Footlocker, and Hannesbrands saw varying levels of decline in their activewear sales. Footlocker states the drop in sales is because lower-income consumers are pressured, particularly due to the resumption of student loan repayments and a weakening household budget.

Growing Trends

According to Kornit, their strong impressions and growing sales performance indicate that the demand for direct/digital/on-demand printing will remain strong for the foreseeable future. Particularly, they see “massive growth in specific customers across [the] US, EMEA and Asia Pacific” regions in spite of current macroeconomic challenges.

You could consider using contract DTG services and fulfillment companies or selling on dedicated on-demand platforms like Shopify to provide on-demand printing to your customers. It will still allow you to sell custom apparel but takes the hassle out of managing shipping, packaging, and other aspects of customer fulfillment.

Alternatively, you could always offer your own in-house, on-demand printing to your customers or consider it a source for contract printing opportunities. Of course, you’ll need to ensure you do have demand for it in the first place.

Meanwhile, the fleece trend is still popular today, with Footlocker reporting that the Nike Tech Fleece collection sold quite well. Delta Apparel also plans on expanding its usage rate with fleece. It helps that fall is coming very soon, so we believe fleece will still be in demand throughout the season.

How Does the Consumer Fare?

There’s been little change in terms of overall consumer spending: it’s still in pretty good shape, with total card spending per household increasing 0.7 percent year-over-year (week ending September 2nd). There was minimal change in retail spending for all three income categories.

The current savings rate and prevailing credit card debt are particularly important to you as a business owner. Both elements can greatly influence how your business will fare in the coming weeks.

Saving for a Rainy Day?

The savings rate has gone down month-over-month thus far but is still higher than it was in the same period last year. It’s hard to tell why the savings rate is so low: is it because consumers have little to no money to save because of rising costs of living? Or is it because incomes are still high and consumers don’t feel the need to save?

The resumption of student loan repayments soon may tank the savings rate even further, but given that the Bank of America noted repayments picking up “earlier than anticipated,” there could be “less downside risk” to both spending and saving in the coming months.

Repaying Debts

On that note, household debt is currently at an alarmingly high level. It exceeds peak levels last seen in May 2008 while being well above the 10-year average. According to the Bank of America, they estimate the average household currently has $9,432 in credit card debt as of June – a shockingly high figure indeed.

If that’s not alarming enough, the Federal Reserve Bank of New York recently revealed that the total US household debt in Q2 of 2023 has reached $17.06 trillion! For further context, that’s an increase of 0.1 percent from the previous quarter, equal to $16 billion. Of that total, credit card debt balances went up to a whopping $1.03 trillion (see chart above), while auto loan balances rose by $20 billion to reach $179 billion.

Consumer Confidence

The University of Michigan’s Surveys of Consumers saw a minor downward trend in consumer sentiment, reaching 67.7 as of early September. Consumers are nevertheless cautiously optimistic about current economic conditions, and their tune will undoubtedly change if a federal government shutdown should occur in the wake of a Congressional dispute.

Similarly, the Conference Board’s Consumer Confidence Index also saw a dip from 114 in July to 106.1 in August. More consumers were worried about “rising prices in general and for groceries and gasoline in particular.”

On the whole, nothing drastic is happening outside of the low savings rate and phenomenally high household debt. You can expect fewer customers frequenting your print shop as things progress, so you should continue to double down on strengthening your cash flow.

Corporate Profits Slipping

According to Piper Sandler’s statistics, domestic profits are expected to fall later this year (estimated 8 percent rate, year-over-year) and perhaps even further in 2024. They’ve already noted that pre-tax profits have fallen by $11 billion in the second quarter and that after-tax profit margins are also likely to fall by 11.8 percent from the second quarter’s 12.3 percent. Much of this is attributed to rising labor costs and higher interest expenses.

Our previous article also stated that wages are growing faster than company revenues, on top of interest rates remaining high. The Fed is expected to make one final rate hike in November this year, which will only further squeeze profits even further. If margins narrow per this estimation, Piper Sandler believes corporate profits will likely decline as much as 10 percent year-over-year by next year’s second quarter.

A similar trend in slowing revenues compared to compensation happened before the prior 2001 and 2008 downturns. This would further be compounded by tightening bank lending standards, higher corporate interest payments, and even currency depreciation – all of which aren’t painting a bright picture for overall margins.

Meanwhile, Reuters reported that average hourly earnings increased 0.2 percent in August, with a 4.3 percent year-over-year increase. While wages have “moderated” somewhat, the ongoing strikes will likely put further “upward pressure on wages” as a whole.

As a result of this rather bleak outlook, Piper Sandler is expecting an estimated 9.5 percent decline in profits by the second quarter of 2024. The squeeze isn’t going to end very soon, either.

Shifts in the Labor Market

Conversely, nonfarm payrolls did see a modest rise in August, with 187,000 jobs compared to July’s 157,000 jobs. However, it’s still less than the average monthly gain over the previous 12 months, which could possibly indicate companies are fretting about their lower profit margins. The JOLTS report for August also saw a dip in job openings, falling by 338,000 to 8.827 million in July; this makes it the lowest level it’s been in 2.5 years.

Meanwhile, the unemployment rate went up to 3.8 percent from July’s 3.5 percent, signaling a potential uptrend beginning despite some industries actively seeking new employees.

Unemployment claims have also hit the lowest level since February, with initial claims falling by 13,000 to 216,000 in the week ended September 2nd. Continuing claims also fell by 40,000 to hit 1.679 million in the week ended August 26th. While this might seem good news, Piper Sandler believes that “residual seasonality is skewing official claims data downwards.”

By Piper Sandler’s projections, claims are expected to increase in October to reach their 300k target by year-end. Should this occur, it would also mean payroll growth will “dwindle before outright declining” in the fourth quarter of 2023 and potentially extend well into 2024.

Fourth Quarter Blues

The way things are going, we seem to be seeing signs that we’re now on a slow slide toward a downturn by the fourth quarter of this year. On the plus side, consumer spending is in pretty good shape, helped substantially by higher incomes from jobs. However, that can still change as savings dwindle and costs continue to rise while companies cut down on compensations and retrench staff to maximize profits.

If the strikes are any indication, companies may likely see compensations stay high for a while longer. The lower quits rate and fewer resignations in August seem to suggest that either employees are earning more (or are able to negotiate better wages) or that they’re feeling “less confident in their ability to find a new… higher paying job.”

Speaking of which, Piper Sandler states that the labor market is beginning to cool before reaching recession territory by the year’s end. In their view, it’s reflected in data points such as “higher unemployment rate, softening payrolls, fewer job openings, falling temp employment… and stagnant jobs in the nonfarm productivity report.” Current data does seem to point out that this may be the case.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is also looking grim as “persistently high mortgage rates above 7 percent” are still tanking builder confidence and buyer purchasing power. This is also reflected in the National Association of Realtors’ recent report, which found that nearly one in five surveyed realtors’ customers are waiting for mortgage rates to fall.

If you still recall the HOPE framework, the housing market is a leading indicator that affects the rest of the economy. If the housing outlook steadily worsens, you had better take steps to shore up your cash reserves and brace for the downturn.

The US manufacturing sector did shrink yet again, but the Institute for Supply Management (ISM)’s most recent Manufacturing PMI report seems to denote “a slower rate of contraction.” Meanwhile, the services PMI saw an increase for the eighth consecutive month, with gains in thirteen industries, including Accommodation & Food Services.

“Demand remains soft, but production execution is consistent with new, reduced output levels based on panelists’ companies’ order books. Suppliers continue to have capacity. Prices are generally stable.”

Timothy R. Fiore, Chair of the ISM Manufacturing Business Survey Committee

Conclusion

Are you still strengthening your cash flow and saving funds for when that storm eventually hits? Good, because we’re continuing to advocate for that. That still means you’ll have to refrain from expansion plans. Just because that storm still hasn’t happened yet doesn’t mean it isn’t still on its way.

On-demand printing is still a very popular choice these days. It may be worth your time and effort to branch into on-demand printing, especially when you can cater to a new niche while giving you flexibility as the print-on-demand provider handles everything. Be sure to do a test run first and see how well your new products are received before you go all-in on the idea. You can even get the opinions of your existing customer base to give you some useful suggestions.

Fleece has also not lost its edge, either. If you’re still receiving orders for custom fleece apparel, keep doing that. With fall coming soon, its popularity isn’t going to wane any time soon.

Lastly, make sure you maintain the quality of your products and services. With how popular custom apparel decoration is becoming, there’s plenty of competition to give you a run for your money, especially if your quality takes a hit. Consumers want to save as much as possible with their purchases; brand loyalty isn’t everything nowadays. Even if you can’t buy new equipment or expand your reach to new locations, you can still find creative ways to draw in a new audience.