Trade Resources Industry Views The United States Is Set to Become an Even More Dominant Market

The United States Is Set to Become an Even More Dominant Market

The United States is set to become an even more dominant market for the diamond industry in 2015. In a reversal of trends that have characterized the industry in the past few years, there has been a shift back from east to west as industry growth is being supported by stability in the U.S.

Last year was hardly a stellar year for the diamond trade. Profit margins tightened and polished prices fell with the RapNet Diamond Index (RAPI™) for 1-carat laboratory-graded diamonds declining 8.7 percent in 2014 (see the recently published Rapaport Monthly Report – January 2015). One shudders to think how far polished prices might have dropped if it wasn’t for U.S. demand.

In that context, diamond market trends in 2014 were more influenced by the slowdown in China. Jewelry retailers there had built up inventory in anticipation of continued fast-paced growth that didn’t materialize. A Reuters poll of 31 economists published this week suggested that China’s gross domestic product (GDP) is projected to have grown by 7.2 percent in the fourth quarter of 2014, which would be its weakest rate of expansion since the first quarter of 2009.

While most countries can only dream of 7 percent growth, the numbers are viewed in the context of the double-digit growth experienced in the preceding decade. The pullback was inevitable given that China is in a necessary transition phase as the economy matures. The government of Xi Jinping has embarked to transform the economy to being consumption-driven rather than one fueled by government investment and infrastructure projects.

The inevitable slowdown during this transition has resulted in indigestion within consumer-related industries such as the diamond and jewelry market – and certainly within the trade – that is expected to continue through 2015. Furthermore, the government’s anti-corruption campaign to curb excessive displays of luxury wealth and conspicuous consumption continues to affect luxury demand.

Similarly, India’s growth slowed in the past two years, although things are looking up as sentiment has improved since the May election of Narendra Modi as Prime Minister. Elsewhere, European unemployment remains high and Japan continues to struggle to sustain economic momentum.

Therefore, the diamond market continues to look to the U.S. for support, especially as most economic indicators there are currently positive. GDP grew by 5 percent in the third quarter of 2014, according to the government’s most recent report, marking its fastest quarterly growth in 11 years. Fourth quarter data is scheduled for a first draft release on January 30, but forecasts point to growth of around 3 percent during the final three months of the year.

More importantly, consumer confidence rose in December and continues to be relatively high in January as unemployment has steadied below 6 percent.

That said, feedback about the U.S. Christmas season has been mixed. The latest Commerce Department data signaled a positive start as retail sales rose 0.7 percent in November from a month earlier, which was its strongest gain in eight months. The December retail sales data is scheduled to be released on January 14. Meanwhile, Retail Next, an analytics company, estimated that in-store sales fell by as much as 8 percent during the season, while overall holiday sales probably grew by 3.5 percent to 4 percent perked up by strong online buying.

The strength in the online space was a constant throughout the holiday period exceeding even the optimistic pre-season expectations of Gian Fulgoni, the chairman of comScore, an online analytics company. comScore estimated that  U.S. online retail sales rose 15 percent year on year to $53.3 billion during the Christmas season, from November 1 to December 31.

Fulgoni offered an overall positive view of the U.S. retail space this holiday period.

“The U.S. consumer proved resilient and flexed their spending muscle online this year,” he said. “Increasing positive consumer sentiment, improving job growth and declining gas prices all combined to create a more favorable spending environment, and consumers responded by opening up their wallets in a way they hadn’t since before the financial crisis.”

One does not sense that jewelry experienced the spurt in the same way that the electronics or apparel industries did. Still, jewelry retailers who spoke with Rapaport News in December reported seeing year-on-year increases in the high single digits. Many noted that affordable jewelry and very high-end pieces sold well, while the mid-tier did not perform as well as expected, including diamond solitaire earrings and 1-carat stones.

Indeed, Signet Jewelers, the largest jewelry retailer in the U.S., which owns the Kay Jewelers, Jareds and Zale brands, reported that its November through December holiday same-store sales grew by just 3.6 percent, with growth driven by its U.K. division, while its online sales jumped 20 percent on a like-for-like basis. Tiffany & Co., another bellwether for the industry, is scheduled to report its holiday sales after press time on Monday, January 12.

Still, jewelry buying was likely spurred by U.S. consumers feeling more wealthy and confident about their future. Stock markets soared in 2014, with the Dow Jones industrial average breaking the 18,000 point barrier for the first time in December and, theoretically at least, lower oil prices should translate to their having more money for discretionary spending. Similarly, the stronger dollar should increase the U.S. consumer’s disposable income.

Indeed, real disposable income, or household purchasing power, is expected to have increased by close to 3 percent in 2014, after having dropped by 0.2 percent in 2013.

The Federal Reserve said in minutes from its December meeting released this week that lower energy prices are likely to boost spending in the U.S. “[Lower oil prices] are certainly good for families, for households,” said Fed chair Janet Yellen. “It's putting more money in their pockets.”

Of course there are some caveats that raise cause for concern in 2015. The Fed cautioned that weakness in the global economy could yet affect U.S. growth. Furthermore, expectations that the Fed will start raising interest rates from mid-year will likely lead to higher prices and certainly a higher cost of debt to the average household.

Regardless, with more money to spend, U.S. consumers seem in a better position than ever at this juncture. It is certainly up to the trade to entice those dollars to the jewelry stores (or websites). That should give diamantaires hope that the prospective growth will be enough to carry the global industry as other markets look weak. At the very least, the U.S. will offer them the stability they crave. And in so doing, the U.S. should solidify its position as the dominant market for the diamond industry in 2015.

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A U. S. -Driven Diamond Market
Topics: Arts & Crafts