The National Retail Federation (NRF) predicts that 2005 GAFS sales (general merchandise stores, apparel stores, furniture, and home furnishings stores, electronics and appliances stores, and sporting goods, hobby, book, and music stores) will increase 3.5% from the previous year.

However, NRF says the luxury sector is expected to “thrive” this year because high-income families are less affected by slow income growth and higher energy prices. In addition, the weaker dollar is increasing the demand for luxury purchases by tourists.

In its quarterly Retail Sales Outlook Report, the NRF cites tough comparisons and lack of economic stimulus as the reasoning behind its guarded forecast.

NRF says strong comparisons will make this year more difficult for growth, said NRF. Last year GAFS sales increased nearly 10% in the first quarter, which will make first quarter growth this year hard to achieve. This year, because of these tough comparisons, NRF is predicting growth of 3.7% for the first quarter.

There are other reasons for NRF’s restrained forecast, said Rosalind Wells, NRF chief economist. “This year, consumers will be under increased financial pressure due to higher energy costs and slow wage growth,” she said. “Additionally, past stimuli provided by tax cuts and very low interest rates will no longer be there to boost consumer spending.”

Wells added that labor market will be a telling factor in the level of growth retailers will experience this year. “The consumer has been remarkable in shouldering this economic expansion, but now something has got to give,” she said. “The labor market will continue to expand this year, though our concern is that modest employment growth will lead to modest income growth, which will put a financial strain on consumers.”

Discounters, on the other hand, will continue to be challenged as their core consumers are most affected by higher energy costs and slow income growth. Also, as the housing market softens, the furniture and home furnishings sector could begin to experience slower growth.

GAFS sales grew 6.7% in 2004, the highest retail sales growth since 1999.

JCK