Consumer Spending Up, Holiday Retail Growth Predicted

As Halloween arrives, we see green and red mixed among the black and orange at most of our local retailers.

Christmastime will soon arrive, and along with it, the most essential time of the year for retail sales and associated tax revenue for local governments.

The National Retail Federation reports that holiday spending (retail spending in November and December) should increase 4.1% this year, to $586.1 Billion. This is less than the 5.6% growth experienced last year, though still above the 3.1% 10-year national average.

This forecast is being buoyed by other economists. Wells Fargo released their holiday sales forecast this morning, predicting 3.8% growth this year.

Recent indicators point to increased holiday spending, including improvements in consumer confidence and some growth in employment. However, Wells Fargo’s analysis does reflect some concern about underlying economic uncertainties, especially following the arrival of the new year:

The looming uncertainty around the impending fiscal cliff, sluggish job growth and slowing real disposable income will serve as headwinds to consumer spending this holiday season. On the plus side, the very slow expansion of consumer credit should help to support some consumer spending this holiday season even in light of very slow income growth…

“…The positive momentum in consumer confidence over the past few months will be balanced by slow personal income gains and economic uncertainty abroad along with uncertainty over domestic fiscal policy.

Lack of personal income growth is a serious concern as well.

Real disposable income grew by only 0.9 percent, on average, for the year ended September 2012 compared to a growth rate of 2.1 percent over the year-earlier period. It is true that real disposable income has been trending up lately, however the upward trend at this point is likely too weak to have a meaningful effect on this year’s holiday sales prospects. In addition, there are downside risks to after-tax income beginning next year. The impending fiscal cliff, which includes a series of tax increases, has the potential to dramatically cut real disposable income on the part of consumers. The cut to disposable income will also likely effect consumers’ ability to pay back any credit card debt racked up through holiday shopping.

This trend is already evident in the latest update to personal income and consumption, released earlier today. Spending increased 0.8% for the month of September, with half of that reflecting inflation due to rising prices in energy, food and other essentials. Personal income did increase 0.4% in September, but that follows a 0.3% decline for August.

Current annual trends show a 1.8% increase in real disposable income, compared to 2% increase in real consumer spending.

As a result, while there appears to be strong sentiment in favor of increased consumer spending and a “Merry Christmas” for retailers this year, there are several “headwinds” that could dampen retail activity shortly after the start of the year.

Again, from Wells Fargo…

…this spending trend may not be sustainable entering into 2013 if we do not see a significant improvement in the labor market. We believe this increase in consumption is at odds with the high probability that some taxes are going to increase early next year. Consumers may be trying to preempt this increase in taxes in the future by consuming today because they know they may not be able to increase consumption as much next year. In any case, we still believe that this improvement in consumption is not sustainable, and, while consumers still have some leeway, i.e., they can continue to save less to support higher consumption in the coming months, the end of this behavior is probably in sight. This is especially true, in our opinion, if personal income and employment does not improve considerably. Of course, consumers could be, once again, starting to use more credit, supported by an improvement in consumer confidence, but this, also, has to have some more real support to make this behavior sustainable in our view.

As for the ongoing transition of retail activity from brick-and-mortar stores to online sales, Deloitte reports that 25% will do most of their holiday shopping online, with 75% purchasing at least one holiday item in such a way.

Internet sales are projected to grow 12.1% this year, according to the National Retail Federation.

At the same time, brick-and-mortar stores are still optimistic they will stem the tide on  lost sales to the Internet. Expanded layaway, earlier promotions and other incentives will be used to encourage physical buying.

For local governments, several factors are at play. Local employment conditions can definitely skew the relevance of national trends, as can the arrival or loss of major retailers. The first half of 2012 saw several major stores, notably Sears and Best Buy, close several North Carolina locations.

At the same time, we have seen growth in other retail sectors, especially a dramatic rise in construction and opening of discounters like Dollar General and Family Dollar. Major drug stores like Walgreen’s and CVS, which also ramp up in-store sales for the holiday season, have also expanded across the state.

Independent and locally-owned businesses have also initiated significant efforts to increase visibility and awareness with residents and consumers. Given higher gas prices, those living outside major cities may be more open to choosing local business options for their physical shopping.

Retail activity for November and December will not be consistent across the State of North Carolina as a whole, and there are a lot of uncertainties that could further deepen the drop off we usually see the first couple months thereafter. However, if the economists, most areas should see some growth of sales, building upon the retail recovery we have experienced in the last year or so.