The worldwide financial system is in trouble. Stock markets are in turmoil. Diamond demand is down. We’re apparently in a global recession. How can you make business plans for 2009 and beyond in that kind of environment?

 

We’ve recently been besieged with questions from jewelers about how to plan for 2009. They’re requesting our industry sales forecast. They’re asking our opinion about how they should build their sales and profit budgets.

 

Frankly, we don’t have all the answers. If we did, we’d be in Tahiti, basking on the beach, rather than struggling along with everyone else in this challenging environment.

 

But there are a few things we know that can help put events in perspective and plan for 2009.

 

• It’s not the end of the world.
  • We’ve had far worse economic challenges.
  • People have been wearing jewelry for 50,000 years or more. It is not a fad product. People are going to continue to buy and wear jewelry.

• Recessions are a normal part of the economic cycle. Since 1854, there have been 32 cycles of expansions followed by contractions in the U.S. economy. The contractions have lasted an average of 17 months (about a year and a half), and they were followed by 38 months (over three years) of economic expansion.

• Since 1980, there have been only three periods considered to be recessions in the U.S., prior to the current recession:

• January 1980 – November 1982
• July 1990 – March 1991. From 1991 to 2000, the U.S. experienced 37 quarters (over nine years) of economic expansion, the longest on record.
• March 2001 – November 2001
• Current: December 2007 and counting.

• The stock market is not an accurate predictor of recessions. Since 1946, only about half of the stock market declines of 10 percent or more have been followed by a recession. In other words, the stock market has a 50/50 chance of accurately forecasting a recession; those same odds can be obtained by flipping a coin. When trying to predict the economy, ignore Wall Street.

• There is no commonly accepted definition of a global recession. The International Monetary Fund (IMF) says the world is in a recession when global economic growth is less than 3 percent. The IMF says global recessions seem to occur over a cycle of every 8-10 years. We are due for a global recession, based on that cycle.

• A recessionary environment rids the system of excesses. The weak die; the strong emerge stronger.

• We’re not headed for another Great Depression:

• No credible forecaster is calling for a large decline in the U.S. Gross Domestic Product. Consensus GDP forecasts call for a 1 percent decline in 2009, followed by a 2 percent rebound in 2010. GDP fell by 13 percent in 1932, at the height of the Great Depression.

• Mortgage delinquencies in the Great Depression were over 50 percent; today they are in the 7 percent range.

• Fewer than twenty-five banks have failed, unlike the 4,000 that went under in early 1933.

• Unemployment is still below 7 percent, and is expected to peak at just over 9 percent in 2009 (it is a lagging indicator, and not indicative of when a recession will end). The current and projected unemployment level is far below the 24.9 percent unemployment rate in 1933, when Franklin Roosevelt became president. Further, it is well below the 10.8 percent unemployment rate which occurred in November and December 1982. Jewelry sales were down 2.5 percent in 1982.

• The media has had a field day, because they know “fear” sells. Much of the panic we’ve seen has been hyped by second-by-second news blasts from talking heads. The media is infrequently quoting rational mainstream economists; instead, they seem to be searching for those who are “off the sanity scale” with forecasts. Turn off the television, and don’t look at the newspaper headlines first thing in the morning.

• Too many people draw a straight trend line from daily statistics to try to predict the future. While October and November jewelry sales have been especially weak, there is no reason to believe that jewelers should make their plans based on two months of disappointing results.

• Be a critical news consumer, scrutinize every fact and number. Many of them don’t make sense. We have found numerous errors in articles related to the economy and the jewelry industry.

• Historically, consumer spending in the U.S. has recovered in about six months after a system shock. This time, there have been a number of system aftershocks, and we aren’t sure when we can begin counting the six-month period. Our best guess is that consumers will be back in stores sometime during the second half of 2009, in time for the all-important holiday selling season.

• Consumer confidence is not an accurate predictor of retail sales. While this seems illogical, a mathematical correlation between these two indicators shows that there is a very low correlation. The Conference Board, which publishes the Consumer Confidence Index, issues this disclaimer regularly, warning not to equate consumers’ shopping habits to Consumer Confidence.

• No tsunami or earthquake has destroyed the American infrastructure. The world really doesn’t look much different today than it did a year or two ago. Go ahead: step outside and take a look for yourself.

• The smart business leaders use a recession as an opportunity to position themselves for the future. As one enlightened executive said, “You either buy your competition or you bury your competition in a recession.”

 

History as a Predictor of the Future

You’ve seen the disclaimers from your Wall Street brokers: “Historical results may not be indicative of future performance.” That may be true for them, but in fact, history serves up valuable lessons for us, and it is a good indicator of the future. Yes, history does tend to repeat itself.

 

Historically, when the economy slows, jewelry demand weakens significantly. When the economy grows, jewelry demand is very strong.

 

Because we believe that history can provide a guide to the future, we have gathered economic and jewelry industry data from 1929, the acknowledged beginning of the Great Depression.

 

A cursory view will confirm this: jewelry sales don’t plummet when the economy slows; they just weaken notably. Jewelry sales typically show a greater percentage decline than GPD, but they don’t fall off a cliff. The exception to that rule would be during the Great Depression when jewelry sales fell by a record 36 percent in 1931. However, GDP fell by a double-digit 13 percent around the same time.

 

The graph below summarizes GDP versus U.S. jewelry sales from 1929 to 2010. The GDP forecast for 2008, 2009, and 2010 represents consensus forecasts as of early December. The yellow boxes represent recessionary periods, as defined by the NBER (National Bureau of Economic Research). The NBER has the task of defining economic cycles in the U.S.

 

While GDP growth contracted around 1946, it was not a recession, according to the NBER. The economy was moving from a war-time period to a peace-time period, and economic growth is often volatile under those circumstances.

 

It is interesting that the U.S. economy sank into a recession in the mid-1970s, but jewelry sales remained particularly robust.

 

 

Source: BEA, NBER, BLS, JIRI

 

Specialty Jewelers’ Sales Often Fare Worse in Recessionary Periods

For reasons that aren’t entirely clear, specialty jewelers fare poorly in recessionary periods.  

 

• Specialty jewelers’ sales are usually weaker than total industry sales in recessionary periods.

• Specialty jewelers tend to lose market share more rapidly in recessionary periods (except for the 1980-82 recession), and they don’t recover that market share when the economy recovers.

• Specialty jewelers have lost substantial market share over the past four decades. At their peak in 1973 (reliable data goes back only to the late 1960s), they held nearly 73 percent of total U.S. jewelry sales. The balance of jewelry sales were made by mass marketers, catalog showrooms, and others. By 2007, specialty jewelers’ sales have fallen to about 47 percent of total U.S. jewelry sales.

• Unfortunately, there is no reason to believe that these trends will be different in the current environment.

The graph below summarizes specialty jewelers’ sales versus total U.S. jewelry industry sales versus economic growth. The table also summarizes specialty jewelers’ loss of market share since the 1960s.

 

Source: NBER, BLS, JIRI, US Dept of Commerce

 

The graph below illustrates how specialty jewelers have lost market share over the past several decades. These jewelers tend to lose market share at a greater rate during and just after a recessionary period. Typically, they don’t recover this market share.

 

Ironically, just as jewelers appeared to be regaining market share in 1980 and 1981, the U.S. economy hit the skids, and they lost significant market share over the following decade.

 

Source: NBER, BLS, JIRI, US Dept of Commerce

  

The Bottom Line: A Tentative Sales Forecast for 2009

After reviewing all of the data, we believe that retail jewelers should plan for a “down” year in 2009, but not dramatically down. We’re assuming that soaring jewelry price inflation cools – it has been running at about 7 percent (annual rate) at the retail level for most of 2008. Thus, we’d be comfortable with a sales decline in the 5-8 percent range for the full year for U.S. jewelry retail sales.

 

We expect there to be significant volatility in jewelry sales on a month-to-month basis. Further, we expect there to be a wider-than-normal variation in the sales numbers that individual jewelers report: some will post solid gains while some will post sharp declines. The first half of the year will be weaker than the second half, in our opinion.

 

Wholesalers and suppliers will likely experience more disappointing and volatile sales trends for two reasons:

 

• Retail jewelers are likely to be slow to re-stock merchandise. Of course, this could lead to a self-fulfilling prophecy: if the merchant doesn’t have goods, he can’t make a sale.

• Retail jewelers are going to learn how to exist with lower owned-inventory levels. Either they will push ownership back on the vendors, or they will learn how to turn their inventories more efficiently. Throughout this process, there will be dislocations in the distribution pipeline.

Excel File with Data Available

Readers who would like the data in this research report so they can compare it with their own business data, simply send your request for an Excel file to research @ idexonline.com. In the subject heading, please note GDP Jewelry Sales Data Request. You will be able to post your own data in the columns adjacent to the base data and manipulate it to suit your needs.

 

Further, for those with sharp eyes and attention to detail, you will note that the jewelry sales numbers in the Excel file tables differ slightly from those we have been using earlier this year. In late November, the U.S. government released a major revision of retail sales data, and jewelry sales were restated for the past decade or so. The Excel file reflects the latest government data.