Tax cuts to help sales climb 4.3%

Holiday retail shopping
Retail sales will climb above 4% in 2018 due in large part to tax cuts. (iStock/imtmphoto)

Analysts are predicting the strongest sales growth this year since 2014, due in large part to new tax legislation and confident consumers. 

Kantar Consulting forecasts 4.3% retail growth in 2018, led by big-ticket home goods purchased by tax savings in upper-income households. Consumable brick-and-mortar stores will also have strong growth, but the numbers will still be dampened by store closures led by big names such as Sam's Club and Walgreens.

Still, Doug Hermanson, principal economist at Kantar Consulting, warns retailers to keep an eye on the stock market and where consumers choose to spend, as retail may hit some bumps in the road.

Earlier in the year, the expanded child tax credit will likely help lower- and middle-income households purchase consumables, meaning stronger growth in big-box mass retailers and supermarkets. But it's been a rocky start to the new year, as January retail sales posted their biggest decline in 11 months. According to Hermanson, it was back to the reality of modest wage growth and holiday debts to pay off. And although tax cuts will start trickling into some shoppers’ paychecks in February, consumers will initially use most of that extra cash to recoup savings and pay down debt.

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"I remain convinced that January is a massive reckoning month as people’s health insurance deductibles kick back in—unscientifically, I think this is the fourth disappointing U.S. January in a row from a spending point of view, which parallels nicely with the rise in high deductible health plans in the U.S.," Hermanson said.

Hermanson also warns that the stock market should be watched closely. 

"A lot of the anticipated positives of the new tax policy are already baked into high stock market values. Investors are now focusing on some of the offsets that will occur from higher interest rates and higher inflation. This could encourage or discourage consumers from spending some of that cash from tax policy changes," he said. 

Back to physical and online sales, additional store closures will affect a shift in sales to some degree. Hermanson says online will benefit most from these store closures rather than the existing stores for these retailers. 

In addition, the trend for consumers to shift more and more spending to the services sector will continue, so 2018 may be a greater year for overall consumer spending, while retail posts only a moderate improvement.