I have something of a visceral dislike of the media frenzy that surrounds the holiday shopping season. And I sense this year will be worse than usual, as we are entering the season with what I believe are relatively low expectations. At first blush, those expectations will be easily beaten. From the Wall Street Journal:
Black Friday sales rose 6.6% from a year ago, getting the holiday shopping season off to a strong start, retail data and consulting firm ShopperTrak said Saturday.
The gains were the strongest since 2007 and topped last year's anemic 0.3% increase, said ShopperTrak, which installs monitoring devices in stores to gauge foot traffic.
Discounting works - more on that later. Although I believe underlying household budgets are fragile, I also have faith the American consumer will not break easily. Indeed, note the path of retail sales - excluding autos, gas, and restaurants - since the end of the recession:
For all the talk of a "new normal," retail spending is growing at nearly exactly its pre-recession trend of 0.43% a month. I have no reason to believe this trend will falter in the next two months, and, therefore, would anticipate the holiday season, at least in nominal terms to be at least average if not a little better (average includes some bad years).
What I believe is more interesting is the path of real sales:
In this measure, I converted to real dollars using the GAFO (deparment store type goods) deflator. Note again the similarity between the pre- and post-recession trends, 0.53% and 0.58% respectively. The high real growth is the product of steady price deflation in the retail sector:
Whatever ill is said about outsourcing, it does deliver cheap toys to put under the Christmas tree. Arguably, we are see the tiniest bit of trend reversion, attributable to an acceleration in the deflationary trend through early 2010:
Note that mid-year, retailers attempted to push through higher prices:
Bad timing, as nominal spending slowed somewhat this period to 0.37% a month. The end result was that real growth stalled in the April to August period, growing just 0.2% a month. Retailers apparently expected consumers to simply absorb the higher prices while holding the path of real spending constant. This grossly overestimated the strength of household budgets, and retailers soon reversed course. Prices fell between August and October at a 3.3% annualized pace.
The interesting question is how much retailers will panic and extend the price declines, resorting to deep discounting to continue to move volume. If so, we could see a solid real gain in the November to January period. At least so far, it appears discounting is indeed a key factor enticing early shopping. Back to the Wall Street Journal:
Brick-and-mortar retailers also saw more visits, with foot traffic to malls and shopping centers up 5.5%, ShopperTrak said.
Consumers were drawn out by heavy promotions and early store openings, said Bill Martin, co-founder of the firm.
They remain value conscious, however, and are more targeted in their shopping. It remains to be seen whether the rest of the season until Christmas —which accounts for about a fifth of retailers' annual sales—will keep up the strong pace, ShopperTrak said.
Will a solid holiday season put the nail on the coffin of recession fears? I don't think so. The US is not in recession right now; it is simply premature to be looking for recession in the data flow. If you are concerned about recession, which I am, you are looking at impending fiscal contraction in 2012 coupled with the implosion of the Eurozone, an event that will likely blow back to the US via the financial channels. But if those fears are realized, don't expect too much of it in the data before the middle of next year.
Finally, note that retail sales do not necessarily suffer greatly during a recession. Recall 2001:
The sharp drop we saw in 2008-09 is a relatively unusual permanent (for lack of a better term) negative IS shock that is costing retailers something on the order of $375 billion a year. That is not to likely to be repeated anytime soon. At least I hope not!
Bottom Line: Enjoy the Holiday Season. Don't get too preoccupied with the media-driven "holiday spending" frenzy. It just isn't that important, nor is it a key economic indicator.
