The holiday spending outlook from the ever-optimistic National Retail Federation once again paints a picture of hope, with consumer spending projected to grow 3.5% on a year-over-year basis in November and December. That’s a bit better than the average Christmas-sales growth pace of 2.5% we’ve seen over the course of the prior 10 years.
To its credit, the NRF is generally on target with its encouraging holiday spending projections, knowing consumers tend to find reasons to dig a little deeper into their pockets every year … even when they say they’re not going to.
Nevertheless, there are a couple of red flags that should be deemed potential threats to Christmas shopping in 2015.
The Data Looks Good
The good news: Consumer spending in the United States is stable. The bad news: Consumer spending growth in the United States seems to have plateaued, with last December’s spending being roughly in line with December-2013’s level of per-consumer spending. Consumption for every month of 2014 was comparable with the same month of 2013.
In fact, consumption in 2015 has been modestly weaker overall than 2014’s levels.
That’s the data from Gallup anyway … data that isn’t necessarily supported by similar assessments from the Department of Commerce. The DoC says retail sales are still in a strong uptrend, reaching a record level of $317.26 billion in September.
While grumbling about a lack of good jobs is still in circulation (although that’s an increasingly tougher argument to make), the fact is, wages finally broke out of a rut in 2015. The average wage soared to well above $10.50 per hour in January, reaching a record level of $10.56 per hour in September.
And, of course, on Nov. 6 we got one of the best jobs reports we’ve heard in a long while. All told, the nation created 271,000 new positions last month — the best monthly growth all year — pulling the unemployment rate lower to a multi-year low of 5%.
In light of higher incomes and solid employment, the wealth effect and the spending it drives should be a strong as it has been in several years.
That may be why another recent Gallup Poll found consumers were explicitly planning on ramping up their holiday spending from $781 last year to $812 this year. It’s a figure that still comes up well short of the 2007 peak of $909 (when the wealth effect was in full force), but this year’s spending plans top off what’s now become a four-year growth trend.
And yet, despite their plans to spend more this year, consumers just aren’t feeling the wealth effect.
Consumers Don’t Feel Good
The spending and income metrics look good. But those earnings and spending metrics don’t jibe with sentiment.
As of October’s reading, the Conference Board’s measure of consumer confidence was falling. This isn’t horrific in itself, but after several months of stagnation, any lull is a concern. The bigger concern on the sentiment front, however, is actually the Michigan Sentiment Index, which fell to a multi-month low of 87.2 in October.
In fact, one could reasonably argue that the Michigan Sentiment Index is now in an official (albeit tempered) downtrend.
Both sentiment/confidence measures have overcome stumbles in the past; see 2011 for an example. But sentiment is cyclical, and consumers spending eventually moves in tandem with sentiment, so this deterioration is cause for pause.
Bottom Line for Consumer Spending
The message is mixed heading into the all-important holiday shopping season, but with October’s employment numbers coming in much better than anticipated — and with job growth back at multi-month highs — the message is a net-bullish one.
With the job growth and income growth reported for October, it’s likely that consumer sentiment will pick up again rather than drift lower. Besides, shoppers have already said they’re going to spend more on Christmas gifts this year. The freshest economic data simply lets them justify doing so.
In other words, headed into 2015’s home stretch, consumers are alive and well as they’ve ever been. While the National Retail Federation’s expectations for 3.5% sales growth this year may be a little lofty, respectable year-over-year sales growth is still in the cards for November and December.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
