What will 2017 bring? Our experts predict a profitable year with some challenges for retailers. In the first of this two-part series, we’ll take a look at the general economic factors that will play a role in how your company does this year. Click here to read what trends archery retailers around the country are seeing.

1. Higher Sales

The improved economy should fuel more sales for retailers. “Our view is that 2017 looks better than 2016 for retail sales,” says Scott Hoyt, senior director of consumer economics for Moody’s Analytics, a research firm based in West Chester, Pa. (www.economy.com). Core retail sales are expected to increase by 5.4 percent, up from the mediocre 4.2 percent increase expected for 2016 when figures are finally tallied. (Core retail sales exclude volatile revenues from auto sales and gas stations.)

For the next 12 months at least, economists expect a vigorous increase in the Gross Domestic Product (GDP), or the total spending on goods and services by consumers and businesses. For 2017, Moody’s expects GDP to grow 2.9 percent. That’s a healthy increase from the 1.6 percent growth expected when 2016 numbers are finally tallied, and the 2.6 percent growth of 2015.

2. Strong Labor

So what’s driving the generally favorable economy? From a retailer’s point of view, perhaps the most important economic factor is the labor market, where increases in employment and wages are expected to fill consumers’ pockets with spendable cash.

“The labor market expansion is in its seventh year, the longest uninterrupted period of job gains in recent history,” says Kathryn Asher, associate ecomomist in the research division of Moody’s. That expansion is expected to continue, with unemployment expected to decrease to about 4.6 percent by the end of 2017, down from the 4.9 percent recorded in late 2016.

The nation is finally starting to see signs of wage acceleration. “A number of large companies, such as Walmart, have announced increases in base pay,” says Hoyt. “That suggests tighter labor markets and issues in obtaining sufficient workers. And that bodes well for wage growth.” Average hourly earnings are expected to grow by three percent in 2017, up from the 2.6 percent increase of 2016, which was itself a healthy rise from the 2.3 percent growth of the previous year.

3. Tight Housing

Housing, another economic sector that helps drive retail sales, is expected to continue to do so in 2017. Here again, though, there is a moderating trend. Moody’s forecasts a 3.5 percent increase in housing starts in 2017, a de-escalation from the 9.7 percent of 2016, a pace which was itself slower than the previous year’s rate of 10.7 percent.

The de-escalation is caused not by a decline in demand but by limitations of supply. “Residential construction has leveled off over the past year amid reports of skilled worker shortages,” says Asher. “There are other supply constraints, including buildable lots and credit access.”

The inventory of available homes remains low as consumers continue to snap up the best deals. At the same time, constraints on mortgage credit availability are relaxing. “Lenders are increasingly comfortable extending credit to borrowers with lower scores and smaller down payments,” says Asher. “This is a result of the solid job market and consistently rising house prices, which are closing in on record highs nationwide.”

4. Growing Consumer Confidence

“Consumer confidence has remained remarkably stable over the last year and a half,” says Hoyt. That’s good for retailers, because confident consumers tend to be aggressive shoppers. And when they want to open their wallets wider, banks are cooperating. “An ongoing support for retailers is the increased availability of credit,” says Hoyt. “We are seeing an acceleration of credit card balance growth, and that is a positive sign.”

5. Tighter Margins

Margins for larger employers will continue to compress as the tighter job market puts upward pressure on wages. Poor productivity may also continue to pressure margins over the coming 12 months. “Corporate profit growth will remain modest in 2017 as we look for a 1.4 percent gain,” says Asher.

What to do? “First, become more focused on smart hiring and training,” says Doug Fleener, president of Sixth Star Consulting, Lexington, MA (www.dougfleener.com). “Second, pay attention to improving execution and staff effectiveness. Those two things have to come together to overcome margin pressure. The slogan for 2017 should be ‘individual productivity.’”

6. Fewer Consumer Shopping Trips

“One of the greatest challenges facing retailers right now is the declining number of shopping trips as more consumers buy online,” says Fleener. “This affects even those retailers who are not competing directly with internet outlets.”

Retailers are not adequately tracking their customer count. “Maybe only 10 to 15 percent of independent retailers are using traffic counters,” says Fleener. “But traffic is such a vital data point that if you don’t track it your survival can be threatened. You may think the results of plummeting traffic are due to some other issue, such as poor staff execution, for example, or to marketplace competition.”

Fleener suggests installing a traffic counter and watching the trend in customer visits. “Then look at your marketing and where you are investing your dollars and your time. Ask how you can create incremental visits from current customers. Maybe you can collect contact information and send out newsletters, or improve your social media activity. Or maybe you can do more events to bring in new and current customers.”

Creating a healthy traffic count is critical to success in 2017. “Too many retailers try to make a sale before they get the customer in the store,” says Fleener. “But the retailer of the future is someone who understands how to drive traffic.”

7. Greater Pricing Pressure

As retailers move into the early months of 2017, economists suggest keeping a watchful eye on deflation – that surprise player that dramatically affected retail results in 2016. “Deflation is the elephant in the room that is hindering sales growth,” says Hoyt. “If you compare recent price changes to what happened since the 1990s, most every retail segment is seeing less inflation or more deflation than what is historically normal.”

Deflation has been caused by two factors, says Hoyt. “Low energy prices have reduced transportation costs, which are a major contributor to the cost of retail merchandise. That has put downward pressure on retail pricing. The second factor is the strength of the dollar, which is important because so much of what we sell is imported.”

Retailers should keep a careful eye on their power to control pricing as the year gets underway. The good news is that deflation is expected to experience an adjustment of its own. “We expect deflationary pressures to moderate in 2017,” says Hoyt. “Energy prices are expected to rise more slowly, and the dollar will not rise to the extent it has in the last few years.”