Americans look to be in the mood to shop this holiday season as their buying power gets a lift from more plentiful jobs and cheaper gasoline.
Consumers spent at the fastest pace in three months in October, snapping up everything from clothing and electronics to sporting goods and restaurant meals, a government report showed yesterday. Economists, surprised by the spending strength, said the momentum will carry into year-end.
“Consumers are marginally better off” compared with last year, said Thomas Simons, a money-market economist at Jefferies LLC in New York. “We have been adding more jobs, and while wages are somewhat flat, people who were earning nothing before are earning something now.”
Such resilience may mean the most dire predictions for the holiday-shopping season will be unfulfilled, providing relief to retailers Macy’s Inc. (M) to Best Buy Co. (BBY), which have warned they’ll discount merchandise to boost sales. Economists at Morgan Stanley and JPMorgan Chase & Co. are among those forecasting consumer spending will pick up from its weakest performance in more than two years, helping the economy grow even as companies reduce production to work off bloated inventories.
Retail sales rose 0.4 percent in October, the most in three months and representing gains in nine of 13 categories, figures from the Commerce Department showed yesterday. The median forecast of economists surveyed by Bloomberg projected a 0.1 percent advance.
“We find that the lead-up to the holiday shopping season is an important signal for how sales will go at that crucial time of year,” Peter D’Antonio, an economist at Citigroup Global Markets Inc. in New York, said in a research note. Based on his calculations, the increase for large retail chains was about 0.6 percent, the most since mid-2012.
“We think that rise, along with improved consumer fundamentals, indicate further gains later in the quarter,” D’Antonio said.
Sales of holiday-inclined merchandise, such as apparel, furniture and consumer electronics, will increase by 4.9 percent in 2013, according to West Palm Beach, Florida-based FTI Consulting Inc. While the growth is average by historical standards, “we suspect most retailers will be pleased,” retail analysts led by Bob Duffy wrote in a Nov. 20 report.
Improved consumer outlooks on joblessness combined with gains in home values and financial assets should brighten the moods of shoppers, although income growth is needed to further support discretionary spending, the report said. Last month’s federal government shutdown and other political infighting should have only a minimal effect on holiday sales, it said.
Payrolls have climbed by an average 186,300 workers a month this year compared with 172,700 at the same point last year, Labor Department data shows. Gasoline prices are near their lowest levels since February 2011, stocks are at all-time highs and home prices are climbing by the most since 2006.
A report today showed the number of applications for unemployment benefits declined last week to the lowest level in almost two months, a sign of further healing in the labor market. Jobless claims in the week ended Nov. 16 dropped by 21,000 to 323,000, the fewest since the week ended Sept. 28, according to data from the Labor Department.
Strength in purchases of bigger-ticket items last month, including furniture and automobiles, was an encouraging sign as rising stock and home prices help some Americans feel wealthier, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.
“The biggest positive at this point is the fact that asset prices have risen dramatically this year,” Stanley said.
The Standard & Poor’s 500 Index (SPX) is up 25.9 percent this year, poised for the best annual gain since 2003. The gauge, which closed at a record on Nov. 15, dropped yesterday after minutes from the Federal Reserve’s meeting last month signaled the central bank may reduce bond purchases in coming months as the economy improves.
Today, the S&P 500 snapped a three-day decline after companies including Union Pacific Corp., Johnson Controls Inc. and Ace Ltd. said they would repurchases shares. The index rose 0.8 percent to 1,795.85 at the close in New York.
The rebound in housing is also boosting consumers. Home prices rose 12.8 percent in the year ended August, the most since February 2006, according to the S&P/Case-Shiller index of property prices. Consumers have also spent the recovery repairing their balance sheets, with household debt as a share of income falling to a decade low last quarter.
Cheaper gasoline may offer comfort to households, particularly those in the lower-income brackets. The average cost of a gallon of regular gasoline reached $3.18 on Nov. 11, the lowest level since February 2011, according data from AAA, the biggest U.S. auto club. That compares with an average $3.79 in mid-February.
The lower prices will save consumers as much as $31 billion compared with last quarter, according to economists at Deutsche Bank Securities Inc. in New York, led by Joseph LaVorgna. Each one cent drop in gasoline prices is worth roughly $1 billion in savings on energy spending that could be spent on other items, he estimated in a note to clients yesterday.
Even with improved consumer fundamentals, retailers aren’t taking any chances. Richfield, Minnesota-based Best Buy, the world’s largest consumer-electronics retailer, said this week it will keep pace with competitors’ discounts in the holiday season, hurting fourth-quarter profitability.
Cincinnati-based Macy’s is rolling out “very compelling marketing” in the fourth quarter and expects a “heightened sense of urgency among customers,” making promotions even more important, Chief Financial Officer Karen Hoguet said in a Nov. 14 conference earnings call.
Coach Inc. (COH), the largest U.S. luxury handbag maker, said mall traffic plunged in the first two weeks of October, turned upward in the second half of the month, and then saw “sharp declines” in November.
“Obviously there is a lot of concern out there,” Andrea Resnick, senior vice president for investor relations, told investors at a Morgan Stanley & Co. conference yesterday. “It seems to be a very fragile and volatile consumer environment.”
Consumer confidence sank to a one-year low in early November as households were discouraged by the government shutdown and has regained little ground since, according to the Bloomberg Consumer Comfort Index. (COMFCOMF) The index fell last week following its first gain in almost two months.
A report yesterday showing that company stockpiles rose 0.6 percent in September, twice the median forecast of economists surveyed by Bloomberg, indicates the pickup in consumer spending may not help boost economic growth this quarter. A gain in holiday sales may be met by drawing down on unwanted stockpiles rather than increased production.
Tracking estimates by economists at Macroeconomic Advisers in St. Louis yesterday put third-quarter growth at 3.3 percent, up from the government’s initial estimate of 2.8 percent, mainly because of the buildup in stockpiles. Growth this quarter is running at about 1.3 percent, they said.
Nonetheless, the gain in October retail sales heartened some economists. The stronger-than-expected results prompted Morgan Stanley to boost its tracking estimate of consumer spending for the fourth quarter to 2.5 percent from 2 percent. Purchases are “slightly above” JPMorgan Chase’s 2 percent projection, its analysts said.
That’s an improvement from the 1.5 percent gain in the third quarter, which was the weakest since the three months ended June 2011, according to Commerce Department data.
The fact that consumers kept spending in the face of the spats in Washington bodes well for the economy, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. Even with unanswered questions about new health care regulations, the debt ceiling debate and the government shutdown, Americans didn’t flinch, he said.
“Consumers are facing potential chaos, and in spite of all the reasons not to spend money, they did,” said Naroff. “They didn’t translate the noise in Washington into negative things for themselves. They showed a lot of intelligence.”
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