By Rick MacDonald
After Americans finish their Thanksgiving meals, will they have the stomach to spend heavily on toys, clothing, gadgets, and other goodies? Friday, Nov. 25, marks the official start to the U.S. holiday shopping season. It has become a given among members of the financial press -- and many economists -- that sales this season will be weak (see BW Online, 11/09/05, "A Less Jolly Holiday This Year?").
And yet, we at Action Economics believe year-over-year growth figures will be solid this season, due, if only, to the sizable gains in the economy already seen since the end of last year. Also, rapidly falling energy prices through November have boosted prospects for sales of non-energy-related items.
PLENTY OF RESILIENCY.
The strength in nominal (non-inflation-adjusted) sales thus far in 2005 make it virtually a lock that we'll see big year-over-year figures for sales this year, regardless of the monthly swings in November and December. We expect retail sales, excluding autos, will post a 9% year-over-year gain, even if we see flat monthly figures in 2005's final two months. This would be on par with the hefty 9.3% pace of 2004. Retail sales growth overall should be around 6% year-over-year, which is solid, even if it falls short of the big 9.2% clip reported last year.
Nominal consumption in 2005 should post 6.3% year-over-year growth, which would top the 10-year average of 5.7%. The drag of higher energy prices will leave real year-over-year consumption growth at 3.1%, just short of the 10-year average of 3.7%.
The surge in gasoline service-station sales in recent months has had only a modest negative impact on growth for other components of the retail sales report, despite fears of the usual "substitution" effect. To be sure, consumer fundamentals are weaker than what was seen with last year's stellar sales performance, but they still should be consistent with a healthy level of holiday spending.
Labor-market conditions, though solid, present a modestly less-cheery backdrop for holiday spending. Payroll growth this year will likely fall short of last year's 183,000 monthly pace, by 10,000 to 15,000, due to the negative effects of hurricanes Katrina and Rita. Similarly, the personal-income hit from the hurricanes, alongside heightened ratio of personal tax payments to income in 2005 vs. 2004, should leave disposable-income growth slowing to 4.5%, from 6.1% in 2004.
The stock market has posted smaller gains this year -- around 5%, vs. 12% last year (see BW Online, 11/21/05, "Stocks: More Strength Likely"). The University of Michigan sentiment index is entering the sales season at the lowest level of any season of the last 10 years, though the recent trough marks a temporary hurricane distortion that likely will be at least partially unwound by Christmas. Real estate values have again posted solid gains on a year-over-year basis, heading into the holiday season.
Some other prominent retail surveys show expectations similar to ours, although each survey tends to have a slightly different way of measuring holiday sales, which makes comparisons among them less meaningful:
• The International Council of Shopping Centers (ICSC) expects growth of about 3% to 3.5%;
• The National Retail Federation expects total holiday retail sales to rise 5% over last year;
• Retail Forward expects holiday sales of 5% to 5.5%, which is off the 6.2%-to-7.3% gains of 2003-04, but still strong on a historical basis.
Early holiday-related sales reports support the view that this holiday season should be solid. Visa USA's Holiday SpendTrak is one of our favorite indicators, given that spending on Visa cards represents about 15% of total personal-consumption expenditures. The survey reveals that, through the first two weeks of November, total sales volume has jumped about 13% over the same period in 2004. Specialty Retail and Home & Garden have been two of the strongest retail segments.
Redbook Research also has shown a continued healthy tone, indicating that chain-store sales through the second week of November were running 0.2% above October and 3.8% above last November. The ICSC/UBS retail chain-store index indicated that sales in the most recent week increased 3.9% over the year-ago level. The most pessimistic of the surveys has been ShopperTrak RCT's National Retail Sales Estimate, which revealed that sales decreased 0.9% year-over-year in the first week of November -- marking only the second time in 2005 that a weekly year-over-year figure has been negative.
Wal-Mart Stores (WMT ) has projected strong sales this season, which probably reflects a conscious management effort to push early sales promotions -- likely intended to avoid the sort of bad press they received for sales weakness on the Friday following last Thanksgiving. Industry analysts last year attributed early Wal-Mart sales shortfalls to non-aggressive pricing strategies, and the risk this year is that the retailer is erring in the other direction. Whether or not this is a good business decision, it will likely prompt a solid start to this year's holiday shopping season.
TUCKING LESS AWAY.
Strength in consumer spending in this business cycle has been driven by rising nominal income growth and a falling savings rate that is often seen through the early and middle years of expansions. These cyclical patterns have been exacerbated in this business cycle by falling tax rates and surprisingly lean interest rates.
Market interest rates are now finally creeping upward, after more than a year of Fed tightening (see BW Online, 11/2/05, "Greenspan's Parting Moves"), unwinding one driving force for this cycle's free fall in the savings rate, as examined below. We assume that the uptrend in yields, alongside the natural aging of the expansion and a cooling housing market, will allow the savings rate to finally stabilize through 2006, though economists have been resisting the savings rate downtrend in their forecasts.
Moreover, many economists expected falling confidence measures in 2005 to prompt a reversal in the savings rate this year. But, as we have noted, many confidence measures -- and the gap between the "expectations" and "current conditions" components of the consumer-confidence survey in particular -- often deteriorate through expansions with no corresponding effect on spending or saving. The savings rate downtrend of the last 10 years actually gained steam through 2005, just as economists were talking about deteriorating confidence and a "soft patch" in spending. The downtrend is clear despite the exacerbating, but temporary, savings rate drop in August, which reflected an income distortion from Katrina's damage to personal property.
THE MEDIA'S TAKE.
In total, both tax-rate reductions through this economic expansion, and a falling savings rate, have added an extra boost to this cycle's growth -- and both remain stimulative for the economy as we enter this holiday season. The headwinds from higher energy prices will restrain sales growth this season, relative to the stellar numbers seen in 2004.
But we bet that the 2005 sales performance will still exceed the average performance of the last 10 years. Underlying consumer fundamentals remain strong, as disposable income growth is solid, labor markets are tight, and the savings rate is continuing to fall. Reports next week of strong sales over the weekend may switch the mood of media coverage about the consumer, which has taken a notably dour tone in the aftermath of the hurricane-led surge in energy prices.
MacDonald is global director of investment research and analysis for Action Economics