November 22, 2010
• The National Retail Federation projects a 2.3 percent gain in holiday sales
• The economy has added 1.1 million jobs so far this year
• Households have slashed nearly $1 trillion from their outstanding debt
‘Tis the season—for retailers, that is. Black Friday, the day after Thanksgiving when holiday shopping kicks into gear, is just around the corner. Store receipts over the next few weeks typically account for about 20 percent of annual sales and an even larger percentage of the year’s profits. The question: Will consumers fork over enough money to make the retail season merry and bright?
Retailers are cautiously optimistic, following last year’s spotty results and a dismal 2008. They may not be optimistic enough. While economic conditions are far from where they should be, they are miles ahead of this time last year. Solid increases in labor income have put working households on much sounder financial footing, and consumers have made faster-than-expected headway in rebuilding their savings and reducing their debt. Households are heading into the holidays in the best financial shape in three years, and retailers will surely feel the improvement.
The National Retail Federation is projecting a 2.3 percent increase in November and December sales from a year ago, but many economists expect even bigger gains. “We’re forecasting a 5 percent year-over-year increase in holiday sales,” says economist Mark Vitner at Wells Fargo Securities. Wells Fargo’s definition of holiday sales differs slightly from that of the NRF, but the tally is still more than twice the NRF’s projection, and it would be the strongest showing since 2005.
Vitner and others make a strong argument for a solid retail season. Despite a still-high 9.6 percent unemployment rate and a disappointing 2.8 percent pace of GDP growth so far in the recovery, the economy has managed to create 1.1 million private-sector jobs. Through this point last year, payrolls had fallen by 4.7 million. More jobs mean that income from wages and salaries, a key driver of consumer spending, has picked up this year. Pay has grown at a 3.8 percent annual rate over the past six months, more than three times faster than in the same period last year.
Workers who have remained on the job are still wary of the future, as low confidence readings show, but they have much more spending power heading into the holidays compared with last year. Not only are their incomes growing faster, but inflation is taking less of a bite out of their pay. Consumer prices have risen at only a 0.9 percent annual rate so far this year. The 2.7 percent inflation rate for all last year was three times that, mainly reflecting rising gasoline prices. This year’s stock market gains have also helped. Through the third quarter, households have regained about $6 trillion of the $17 trillion in net worth they had lost during the recession.
“Americans are borrowing less and paying off
more debt than in the recent past.”
In addition, households are cutting their debt loads at the fastest pace in ten years; they have slashed nearly $1 trillion from their outstanding IOU’s over the past two years, according to a report from the Federal Reserve Bank of New York. The ratio of debt to income remains historically high, but it has declined faster than expected, even as consumers have boosted their savings as a share of income to levels not seen since the early 1990s. “Americans are borrowing less and paying off more debt than in the recent past,” says New York Fed economist Donghoon Lee. That squares with survey results from the NRF showing that more consumers intend to use debit cards and cash this season, while the use of credit cards will dip to the lowest level since 2002.
Retailers already feel a shift from last year’s tepid showing. A survey of 27 large retail chains by Forecast IQ shows that 14 project “likely” or “almost certain” sales gains. Last year, only six of the same 27 stores had such expectations. Plus, investors appear to be betting on better prospects for retailers. Since the end of August, a Standard & Poor’s index of retail stocks has surged some 25 percent, about double the overall rise in the S&P 500 stock index.
If stores plan to reward investors’ confidence this year and keep their bottom lines “in the black,” they will have to avoid the massive price discounting that was necessary to move items last year. Retailers ran unusually lean inventories last season, but still had to cut prices sharply, with profits suffering. Retail analysts say consumers will find stores much better stocked this season with more value-priced merchandise accompanied by targeted promotional activity.
But the urge to discount appears to have subsided. According to a survey of chief marketing officers by BDO USA, 64 percent expect more discounts and promotions this season, compared to last year when 96 percent said they planned more discounts. This year shoppers will be focused more on value and less on price, according to NRF President Matthew Shay. Surveys show that basics and necessities will take a back seat to discretionary items, such as jewelry, which has moved up sharply on consumers’ wish lists compared to last year. Plus, the number of people who say they will make a purchase from a discounter is down from last year.
Consumer spending, which has grown at an increasingly faster pace in each quarter of 2010, has easily been the year’s positive surprise in economic growth, and it accounts for more than two thirds of the U.S. economy. Strong auto-led retail sales in October suggest another solid contribution from consumers this quarter. It’s a good sign that, when the holidays are over, retailers will be feeling the joy of the season as they tally up their sales receipts.