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Fashion Law 101: What Fashion Brands must know about the Fiscal Cliff

Posted in The Business of Fashion

With all the holiday fun and festivities (and ongoing 2013 tradeshow preparation), I doubt you want to read about fashion finance, but we would be remiss if we didn’t heighten your awareness to the unresolved "Fiscal Cliff" situation in Washington. 

(if you are a creative type and your eyes glaze over at the mention of budgets, spreadsheet and statistics, skip to the last paragraph.  Everyone else, read on.)

Yesterday, our friends at Fashionista in a post entitled, "The Fiscal Cliff: What is it and What it Means for the Fashion Industry," gave a fashion friendly definition of what the fiscal cliff is:

Fiscal cliff, a term coined by Federal Reserve chairman Ben Bernanke, basically means that right now, we’re Wile E. Coyote chasing the Road Runner, and if the government doesn’t supply a safety net we might just fall into deep financial sh*t in 2013. We’re about to experience the biggest tax increase in history. And the budgets of a ton of government programs are about to be cut.

Now, before we talk about what happens if we fall off the cliff, here is an overview of where the we are today:

  • Reports show that 2012 holiday sales were the lowest since 2008, showing 0.7% growth when the National Retail Federation predicted at 4.1% growth; 
  • The Consumer Confidence index is at an all time low; and  
  • The Stock Market continues to drop in light of the uncertainty in Washington.

This means Retailers are stuck with excess inventory, will run sales to get rid of it, and may post-pone, decrease or cancel orders scheduled to arrive in January and February.

So what happens, in general, if we fall of the cliff?

  • Consumers will have less disposable income because income taxes will increase for most of us, and payroll taxes will increase, meaning you will be bring home less in each paycheck. 
  • Also, since certain tax credits and allowable deductions will be eliminated, and the Alternative Minimum Tax will apply to more people, your 2012 tax refund will likely be lower. 
  • Lastly, because the government will be scrambling to fix this mess in the first quarter, people who usually file their tax returns early won’t be able to do so given all the uncertainty, which again means less disposal income available to consumers.

So, what will this mean for the Fashion Industry?

Given we are already seeing lower consumer spending, if we fall off the cliff, people will spend even less.  Which means retail orders will decrease, wholesale orders will decrease and the liquidity of fashion brands will suffer. 

And, if the government doesn’t fix this soon, you’ll see fashion brand closures, layoffs and down-sizing in the related service industries, especially in advertising and marketing.  Experts vary whether the results will be like those seen in 2008, or worse.

So, here’s to hoping Congress can stop acting like pre-schoolers defending their favorite toys and get to work making sure our economy continues its slow, but steady recovery.