The Holiday Spending Outlook Reflects Continued Consumer Caution About the Economy
American Century Investments
November 17, 2011
Santa may not be in an especially generous mood this coming holiday season, but at least he’s planning on adding a little extra to what he leaves under the tree compared to last year. That outlook is according to the National Retail Federation (NRF), a major industry association for retailers of all kinds in the U.S. And while this forecast is not one to get retailers especially excited about the all-important upcoming holiday shopping season, it is the second best outlook for growth in spending they have had in the past five years. The major challenge for retailers will be that, while spending is forecast to increase slightly, consumers will (as they have been since the Great Recession) be especially price-conscious and bargain-driven—meaning that generating profit growth off any sales increases will be a difficult challenge.
Sales Growth Forecast to Rise 2.8%
As the chart below illustrates, the NRF has forecast a 2.8% increase in holiday spending by consumers this year over the November and December time frame. That is a substantial decline from the 5.6% increase we experienced last year. However, last year represented a somewhat unique situation as the first year in three where sales grew at all, and some of that growth was simply consumers compensating for the cuts they had made in holiday spending the previous two years with a mini-splurge to reward their past frugality.
The increase of 2.8% is also below the 16-year average rate of growth in holiday spending (going back to 1995), which is 3.3%. That number is a bit misleading, however, in that it captures the rapid run-up in spending growth throughout the late 1990s. By removing this period from the average, we arrive at an average rate of 2.6% since 2000, which is much more in line with this year’s forecast rate of growth.
Absolute Spending Should Reach $466 Billion
The chart below illustrates how this 2.8% rate of forecast growth should translate into overall holiday spending of about $466 billion (as illustrated by the bars). That is a forecast increase of about $13 billion versus last year’s total actual sales of $453 billion. As usual, electronics including video games and smartphones are expected to be among the biggest sellers. Gift card spending is also forecast to rise as a longer-term trend—allowing youngsters (especially teenagers) to do their own post-holiday gift buying—continues to gain popularity. One traditional holiday gift category expected to be down in terms of sales is jewelry, especially gold jewelry, given the run-up in gold prices over the past two years.
The impact of holiday spending on short-term employment will be substantial but short-lived. From 1999 to 2007, the retail industry regularly hired between 550,000 to 650,000 temporary workers to help manage the wave of shoppers that descended on stores over the holiday season. That level declined substantially to 239,000 in 2008 and 330,000 in 2009 as holiday sales shrunk dramatically. This year, retailers are expected to add approximately 500,000 temporary workers. And with the rising importance of online shopping to overall holiday (and retail in general) spending, some have speculated that the old days of seeing retailers’ worker ranks swell by over 600,000 people may be a thing of the past.
Per Shopper Spending Is Still Below Its Peak
The chart below plots two time series from 2004 to 2010 with a forecast for 2011: 1) the average spending per shopper during the holiday period, and 2) the number (in millions) of people who will go online on what is now called Cyber Monday (the Monday following the Thanksgiving weekend) to hunt for gifts—especially bargains. The line plotting average purchases by shopper (and this includes online purchases) is forecast to be approximately $704 per shopper this year. This is down from the $719 average that was spent per shopper last year. So, despite the fact that overall holiday spending is forecast to increase by 2.8% this year, average spending per shopper is expected to decline by 2.1% (or $15). Here is where we can best see the continued caution on the part of holiday shoppers to maintain a tight budget, stay within their spending limits, and avoid a situation where they end up (as often happened during the 1990s and first part of last decade) with a major credit card bill in January that only added to their unpaid (and rolled over) balances. In fact, it will probably be a number of years (given the current rate of unemployment, slow economic growth, and low wage growth) before we reach or eclipse average rate of spending record set in 2007 of $755 per shopper. Many attribute this to the “new normal” world we now live in where expectations have been tempered and reduced due to the global financial crisis, the housing market bubble bursting, and the Great Recession.
The other line in the chart above plots a five-year trend and forecast for the number of Cyber Monday shoppers in millions. While this number in 2004 consisted exclusively of people using their desktop or laptop computers at home or work, today it increasingly reflects people shopping and browsing (comparing prices and deals) on hand-held tablets and smartphones. The rapid growth of online shopping is a two-edged sword for traditional retailers. On one hand, it has helped stimulate some growth in overall sales. On the other hand, it has eaten into their in-store sales and reduced traffic and sales volumes in these retail outlets. In addition, the growth of hand-held devices now allows shoppers greater buying and bargaining power at retail establishments as they can show a salesperson what price a competitor is offering for something they are evaluating in-store. This is especially true with standardized products like electronics versus more customized product purchases like jewelry. But nonetheless, online shopping has provided consumers with the ability to make more informed buying decisions based on price comparisons. This is proving to be especially popular as consumers find their budgets and financial situations crimped by the current state of the economy. As a result, it creates extra pressure on retailers not only to generate volume growth but to do it in product categories where they are less vulnerable to pricing and margin pressures.
The good news is we are anticipating positive overall growth in consumer spending during the upcoming holiday season. But on the basis of average spending per shopper, the forecast is for a 2.1% decline. Expect retailers to react aggressively by early discounting and specials designed to get consumers out of the gates and into the spending mode as early as possible. And if forecasts of spending by mid-season (around the end of the first week of December) fail to corroborate the 2.8% growth forecast, it’s likely that retailers will engage in even greater merchandising and discounts in order to motivate still cautious and conservative buyers into action before Santa arrives on the 25th.
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The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
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