2016 Holiday Sales Outlook Executive Summary

Transcription

1 Economics Group Special Commentary Eugenio J. Alemán, Senior Economist (704) Michael A. Brown, Economist (704) Holiday Sales Outlook Executive Summary The holiday shopping season is now upon us, but with slow growth to start the year many retailers are wondering if this holiday season will be something to celebrate. Consumer confidence has remained roughly unchanged from the year-earlier period; however, consumers assessment of current economic conditions is more upbeat. A slight pick-up in inflation has led to flat readings of real disposable income; however, job growth remains robust. We expect holiday sales to rise 3.8 percent this year compared to the 2.9 percent last year. 1 While the absence of inflation pressures last year held back the pace of holiday sales, this year our sales growth forecast receives a slight boost from somewhat higher prices this holiday season. Net of inflation effects, we expect real consumer spending to grow 2.3 percent in the fourth quarter on an annualized basis, matching the pace of growth in the fourth quarter last year. Relatively Stronger Performance for the Consumer Sector Consumer spending in the first three quarters of the year came in relatively strong even though consumer demand was somewhat volatile on an annualized basis. The second quarter was a solid quarter for the U.S. consumer with an annualized growth rate of 4.3 percent, preceded by a weak first quarter when the growth rate was 1.6 percent. Third quarter consumer spending rose a more modest 2.1 percent. Interestingly, consumer demand almost followed the beat of U.S. automobile demand during the year. That is, whenever auto demand was strong, then personal consumption expenditures (PCE) were also strong. Furthermore, although consumption of services has remained positive, the rate of growth of the all-important services sector has slowed down considerably during the past several months. Another component of PCE that has weakened considerably has been non-durable goods consumption. In fact, growth for non-durable goods was negative during the whole third quarter of the year, the first time that has happened since the first half of 2009 when the economy was in the middle of the Great Recession. At that time, the sector recorded four consecutive negative monthly growth rates. Given that labor market conditions remain robust, it is unlikely that non-durable spending will remain weak during the last quarter of the year, thus we expect some help from the non-durable goods sector in Q4. We also saw some improvement in consumer confidence during the year. After the index remained flat from the end of 2015 into the second quarter of this year, the improvement in the third quarter was strong, increasing 6.3 percent in July 2016 compared to a year earlier, while the year-over-year increases in August and September were 0.5 percent and 0.9 percent, respectively. However, the index dwindled again in October, down 0.5 percent versus a year earlier, perhaps affected by the very noisy political campaign season. We expect holiday sales to rise 3.8 percent this year. 1 We define holiday sales in accordance with the National Retail Federation s definition of nominal retail sales less sales at automotive dealers, gas stations and restaurants for November and December. This report is available on wellsfargo.com/economics and on Bloomberg WFRE.

2 2016 Holiday Sales Outlook WELLS FARGO SECURITIES One place where we could look at the effect of the political campaign is, perhaps, in the expectations index within the consumer confidence index. This expectations index has been weakening since July 2015 almost unabated. We only saw one month during this period in which the expectations index was positive year over year, which gives the picture of deteriorating expectations from the consumer. Hopefully, the end of the presidential campaign will help change the path of this consumer confidence component, but for now, the prospects for future consumer demand have dimmed a bit compared to the recent past. Figure 1 Figure Consumer Expectations Index Conference Board Expectations: 83.9 Expectations 3-MMA: Average Monthly Employment Change Quarterly Average of Monthly Change, In Thousands Average Monthly Change: 161 K Perhaps the biggest risk this holiday season is the effect the slowdown in personal income could have on consumer demand. Source: Conference Board, U.S. Department of Labor and Wells Fargo Securities Employment Growth Remains Supportive but Has Weakened Perhaps one of the biggest differences between last year s holiday sales report and this year s is the difference in employment growth, which will have an impact on the strength in income and consumption. Average employment growth during the first 10 months of 2015 was about 219,000 per month compared to a more modest 180,000 during the same period this year. The downshift in employment growth from last year s 2 percent to this year s 1.7 percent is a result of a tightening labor market that is nearing full employment. Even with this year s downshift in job gains, initial fillings for unemployment insurance benefits remain low and the unemployment rate stands at 4.9 percent, which is supportive of consumer demand. A Personal Income Slowdown Has Already Affected Consumption Perhaps the biggest risk this holiday season is the effect the slowdown in personal income growth could have on consumer demand. Although we saw a very strong performance by the U.S. consumer during the second quarter of the year, demand in the third quarter was much more muted. As is normally the case, growth in consumption follows growth in personal income very closely, so the recent slowdown in the growth rate of personal income will continue to have a weakening impact over consumption growth. There are two effects that are contributing to the slowdown in personal income growth. The first one is the aforementioned effect coming from the slowdown in employment growth. However, this effect is still positive for consumption as job growth remains positive, albeit not as strong as it was last year. Second, real personal income growth has been affected, as we said earlier, by the end of the petroleum cycle by which petroleum prices have remained relatively stable and consumers are no longer enjoying the benefits of lower gasoline prices. Nominal personal income, which was growing slightly above 4 percent last year, is now growing at about 3 percent. Meanwhile, real disposable income growth has slowed down from about 3.5 percent last year to just 2.7 percent during the first nine months of this year. Furthermore, our expectation is for inflation to continue to make inroads during the next several quarters and this will further put pressure on consumer demand, which will also adversely affect the performance of holiday sales compared to last year. 2

3 2016 Holiday Sales Outlook WELLS FARGO SECURITIES, LLC Figure 3 Figure 4 Real Disposable Income 3-Month Moving Average 1 9% U.S. Consumer Price Index Year-over-Year Percent Change vs. 3-Month Annualized Rate Year-over-Year Percent Change: 1. 3-Month Annualized Rate: 2.3% 1 9% 3% 3% -3% -3% - - Real Disposable Income, Yr/Yr % Change: 2.3% -9% -9% Source: Conference Board, U.S. Department of Labor and Wells Fargo Securities Holiday Sales Are Expected to Pick Up This Year Based on the current consumer sector fundamentals, we expect holiday sales this year to rise 3.8 percent, an increase from the 2.9 percent pace observed last holiday season and slightly above the National Retail Federation s 3.6 percent forecast (Figure 5). 2 This year s holiday sales outlook reflects somewhat higher consumer prices, which has the effect of boosting the nominally forecasted growth in holiday sales. We expect the consumer price index to rise 1.6 percent and 1.9 percent in November and December, respectively. This stands in stark contrast to last year s November and December year-over-year CPI readings of 0.4 percent and 0.7 percent, respectively. In other words, real, or inflation adjusted, consumer spending will likely match the growth rate observed this time last year. Figure 5 Figure 6 1 Wells Fargo Holiday Sales Forecast Year-over-Year Percent Change for November & December 1 $1,100 $1,000 $900 $800 Average Holiday Spending Dollars per Shopper Expected Average Holiday Spending: $ $1,100 $1,000 $900 $800 $700 $700 $600 $500 $600 $500 $400 $400 $300 $300 - Expected Holiday Sales: 3. - $200 $100 $200 $ $ $0 Source: U.S. Department of Commerce, National Retail Federation and Wells Fargo Securities Even with the rise in overall holiday sales this year, spending per person also looks like it will fall below last year s level. According to the National Retail Federation s (NRF) holiday spending survey, the average holiday shopper is expected to spend $ this year compared with $ last year, a decline of 1.2 percent (Figure 6). 3 The share of consumers using e-commerce to do their shopping is expected to rise again this year. According to the National Retail Federation, online sales are expected to rise between 7 percent and 10 percent this holiday season. The average holiday shopper is expected to spend $ this year. 2 National Retail Federation. (2016). National Retail Federation Forecasts Holiday Sales to Increase National Retail Federation. (2016). Retailers to Prepare for Post-Election Holiday Shopping. 3

4 2016 Holiday Sales Outlook WELLS FARGO SECURITIES We suspect real consumer spending should come in around 2.3 percent on an annualized basis in the fourth quarter. The NRF survey also pointed out that consumers are expected to split their shopping between three main venues, department stores, online and discount stores. Holiday Sales and Q4 Economic Growth With our holiday sales forecast of 3.8 percent this year, we expect total retail sales, which includes gasoline, food service and auto sales to rise 4.2 percent in Q4. With marginally higher inflation, we suspect real consumer spending should come in around 2.3 percent on an annualized basis in the fourth quarter, faster than the 2.1 percent pace of consumer spending observed in the third quarter and consistent with the real spending growth in the fourth quarter of Headline GDP growth, according to our estimates, should come in around 1.9 percent in the final three months of this year. The same theme of modest economic growth of 2.0 percent-2.5 percent and modest real consumer spending is our expectation again this holiday shopping season. Spending should grow enough to ensure the holidays are happy, but the price-conscious, cautious consumer appears to be sticking around for a while. Figure 7 Figure 8 Real Personal Consumption Expenditures Bars = CAGR Line = Yr/Yr Percent Change Forecast 1 U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change GDP - CAGR: 1.5% GDP - Yr/Yr Percent Change: 2. Forecast PCE - CAGR: 3. PCE - Yr/Yr Percent Change: Source: U.S. Department of Commerce and Wells Fargo Securities 4

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