Holiday Spending

Telemus Weekly Market Review November 21st - November 25th, 2022

With turkeys now carved, potatoes mashed, and pie tins emptied, the holiday shopping season is officially in force. For retailers this is a big time of year, as they typically generate roughly a third of their revenue between November and January. Given the significance, markets pay close attention to holiday spending plans in hopes its better than average. This year is one where investors and economists alike will be closely watching to see if anything changes given inflationary pressures and market declines.

Despite higher prices and a lack of fiscal stimulus checks this year, Americans are expected to spend 6-8% more this year than in 2021, according to the National Retail Federation. However, when one considers the annual inflation rate running at 7.7%, on an inflation adjusted basis, spending is expected to be flat.

Over the course of 2022, we’ve seen a shift in consumer spending more toward food and everyday items and less discretionary items. This was ever apparent earlier this month when Wal-Mart and Target reported third quarter financial results. Wal-Mart, which generates a greater percentage of its revenue from groceries, had a strong quarter fueled by higher spending on food we well as attracting customers looking for low prices. Target, which garners more of its sales from discretionary items such as home goods, had a weak third quarter after they experienced customers spending more money elsewhere on everyday items.

Going into the holiday shopping season, the state of the average consumer is different than what it was a year ago. Consumer bank accounts remain flush, but not to the degree they once were. In aggregate consumers generated $2 trillion of excess savings during the pandemic, but that has gradually inched its way down to $1.5 trillion. Compensation is higher, although 4.7% growth in average hourly earnings has not kept up with inflation. This has led to less savings, with the personal savings rate down to a mere 3.1%, the lowest level since 2005. We’ve also seen consumers put more on their credit cards as credit card balances have increased over 17% in the past year.

While conditions for consumer spending remain on solid footing, we see signs that consumption will need to moderate. This could translate to different purchasing behaviors this holiday season. Given what is occurring with inflation, bargain hunting is likely to return. In fact, 59% of consumers were planning to shop during Thanksgiving weekend to take advantage of Black Friday deals. This was nearly double the number of consumers expecting to shop on Cyber Monday.

On the other side, retailers will be closely watching their inventory levels this holiday season. It was just a mere year ago that retailers were stocking up in trailers outside the store wanting to ensure they didn’t run out of inventory. Now, given higher interest rates and the cost to finance inventory, retailers are looking to minimize the amount of excess inventory. Should we see holiday sales come up light of expectations, it wouldn’t be unreasonable to see some attractive clearance sales in January as retailers look to unload any extra supply.

Consumer spending is likely to slow at some point in the coming year, but all signs point to a robust holiday spending season. After the fact, however, I’m sure we’ll notice some further evolution in behaviors and preferences of consumers.

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