By Sober Look
A number of indicators seem to point to a relatively weak holiday shopping season in the US. The Gallup survey index that estimates holiday spending has turned lower (see Twitter chart). As discussed back in August (see post), consumer sentiment peaked this summer and has been declining since.
|Conference Board Consumer Confidence (source: Investing.com)|
Consumers remain cautious in spite of the stock market’s recent gains and improvements in home prices. Some economists blame the lackluster job market and higher rates.
- Jobs remain part of the problem. Outlooks for employment and income were essentially unchanged on the month.
- We think that the risk of higher mortgage costs due to rising interest rates is weighing on confidence too. Consumer confidence started dropping in the wake of the government shutdown, but it has been flat since the tapering debate began and interest costs on new mortgages spiked. Is that having an effect too?
- Plans to buy automobiles, homes, and major appliances all fell — bad news ahead of the holiday shopping season.
And anecdotal evidence for a poor holiday season continues to mount as retailers become increasingly aggressive with promotions:
- WSJ: – On Tuesday, Abercrombie became the first of the larger teen retailers to discuss its third-quarter results. The company also updated its forecast for the rest of the fiscal year, saying it now expects to report a low double-digit decrease in same-store sales for the fiscal fourth quarter, which includes the critical holiday season.
- FT: – Walmart warned of a tough Christmas shopping season for US retailers as it forecast weak sales amid the most intense competition it had ever seen. Despite improvements in the US economy, the world’s biggest retailer by sales blamed the jobs market, political gridlock in Washington and the end of some food stamp benefits for its tepid forecast.
- CNBC: – Tilly’s Inc. shares plunged in extended trading Tuesday after the clothing and accessories retailer reported disappointing third-quarter revenue and gave a dismal earnings forecast for the quarter that contains the holiday shopping season.
Wells Fargo points out that while total sales should increase by 3.7% (vs. 4.1% the previous year), dollars spent per shopper will see the first decline since 2009 (chart below). They blame the federal government dysfunction as well as a shorter holiday season.
|Source: Well Fargo/National Retail Federation’s holiday spending survey|
Wells Fargo: – The lower-per-person spending suggests that consumers will continue to remain cautious and look for deals, including online deals. In a continuation of prior years’ trends, the average individual plans to do 39.5 percent of their shopping online compared to 38.8 percent last year.
While several factors will likely play a role in restraining consumer spending this holiday season, the two main factors are the ongoing uncertainty around federal fiscal policy and the shorter holiday shopping calendar. The fiscal policy uncertainty in Washington has negatively affected consumer confidence and will likely serve as a headwind to holiday shopping. With federal government funding set to run out in mid-January, December likely will be another politically contentious month of debate that could have negative spillover effects on consumer spending. Another headwind facing retailers is the shorter holiday shopping calendar this year due to the later-than-usual Thanksgiving holiday. This year there are six fewer days between Thanksgiving and Christmas, the shortest holiday season in more than a decade. In response to the shorter shopping season, retailers have moved up discounts to spur earlier holiday shopping.
The question of course is – how are the markets reacting to this anticipated weakness in retail spending? The simple answer is that investors in general are simply ignoring the situation – for now. Retail shares continue to outperform the broader market (chart below). The view seems to be that either the season isn’t going to be as bad as some of the forecasts show or that retailers will make up for this weakness in the near future due to improving US economic conditions. Whatever the case, we seem to have a disconnect here.
|XRT= retail ETF, SPY = S&P500 ETF|