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MID-YEAR FINANCIAL REVIEW

July 12, 2013

California Apparel News

Construction and Technology Are Bright Spots for California’s Economy

By Deborah Belgum

http://www.apparelnews.net/news/2013/jul/11/construction-and-technology-are-bright-spots-calif/

Last year, uncertainty was in the air with an upcoming presidential election, potential payroll tax cuts and lackluster retail sales. This year, the economic outlook is more upbeat.

In the last 12 months, California’s unemployment rate has fallen 1 percentage point to 8.6 percent. National retail sales were up nearly 5 percent in May over the previous year, and apparel and textile imports during the first five months of the year inched up nearly 5 percent.

Overall, California is doing better than many other states. “Gross domestic product for the nation is expected to grow by less than 2 percent this year,” said Robert Kleinhenz, chief economist at the Los Angeles County Economic Development Corp. “But for the state of California, the gross state product is expected to grow somewhat faster, at 2.9 percent, this year. This is one indication of how California is growing faster than the nation.”

Other examples are the number of jobs created in the state over the past year. In Los Angeles County, whose unemployment rate in May was 9.6 percent, compared with 11.1 percent a year earlier, job growth has been seen in the leisure and hospitality industries, which added 5,300 jobs as the tourist season kicked off.

Construction jobs were showing healthy gains as more apartment-building projects and single-family homes were being built. As of May, there were 114,000 people in Los Angeles County working in construction, compared with 100,000 the same time last year. That is still down from the peak of 157,600 jobs in 2007.

During the first five months of the year, retail jobs totaled 392,500, up nearly 2 percent from the previous year. But apparel and textile manufacturing jobs continued their slow decline even though manufacturers and retailers have been talking about bringing more clothing production back to the United States (see chart).

Retail Growth

While the U.S. economy is not expected to see large expansion this year, it is on a measured path to grow slowly this year and in 2014.

A recent Capital Business Credit survey of 100 importers and manufacturers selling to major U.S. retailers sees an expected 3 percent to 5 percent rise in Back-to-School sales. More than half of those surveyed thought the season would be better than last year. “We think that unless there is a shock to the economy, people are feeling better about the fall than they did a year ago,” said Andrew Tananbaum, CBC’s executive chairman.

Already, some manufacturers are noticing large economic gains despite a slowing Chinese economy and a recession in Europe that has dragged on for 18 months, the longest slump since World War II.

Levi Strauss & Co. saw its 2013 second-quarter profits triple from a year ago as sales in the Americas saw double-digit gains. For the three months ending May 26, the San Francisco–based apparel behemoth reported a net income of $48.1 million, compared with $13.2 million last year. Sales for the quarter inched up to

$1.1 billion, compared with $1.05 billion one year ago.

Gross margins jumped to 49.9 percent of sales from 45.9 percent a year ago, in part due to lower cotton prices and dropping the bargain basement–priced Denizen brand of jeans in Asia. The company is focusing on its Levi’s and Dockers brands for growth.

The Gap Inc., the country’s largest specialty retail chain, had a very good first quarter, ending May 4. The San Francisco–based company saw profits rise nearly 40 percent to $333 million in the first quarter of this year, compared with $239 million last year. Net sales for this year’s first quarter were $3.73 billion, compared with $3.5 billion last year.

All that growth in clothing sales was reflected in apparel imports, which grew 6.8 percent in volume during the first five months of this year, according to the Department of Commerce’s Office of Textiles and Apparel. China still accounted for about 40 percent of those imports.

Retailers had worried that a 2 percent rise in the payroll tax at the beginning of this year would cut a chunk out of clothing sales. But retail sales continue to grow even though the U.S. economy is slogging along.

Forecasts show the U.S. gross domestic product won’t see any major spurts of activity for a while. The International Monetary Fund recently lowered the United States’ GDP estimate from 1.9 percent to 1.7 percent. That lackluster performance is due in part to lower export sales with the country’s economically challenged trading partners, including countries in Europe, and developing countries such as Brazil, India and Russia.

California, nevertheless, is expected to continue growing faster than the rest of the nation with its tech-savvy industries generating new ideas and products.

Construction is another bright spot in the state. A recent economic forecast by the A. GaryAnderson Center for Economic Research at Chapman University estimated that construction spending is expected to rise 16 percent in Orange County through 2014. “Overall, there is a pickup in economic activity, and that is leading to higher job creation and a drop in the unemployment rate,” said Esmael Adibi, who directed Chapman University’s economic forecast, released on June 12.

Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast, concurred that construction is set to grow. “California isn’t overbuilt, especially along the coast,” he said. “When you see job growth, you see kids moving out of their parents’ house and looking for places to live.”