With Halloween in the rear-view mirror and winter holiday decorations in department stores in full swing, RSM forecasts nominal retail sales from October through December will increase nearly 5.0% on a year-over-year basis.
Given that many promotional events began in early October, consistent with our forecast from last year, and with October retail sales set to be released on Nov. 15, we are defining the holiday shopping season as October through December for this forecast.
Inflation, labor and savings provide upside potential
Unlike last September, when core inflation was 6.7% on a year-over-year basis, this year core inflation has fallen to 2.8%. Further, inflation on two important holiday shopping categories, apparel and recreational goods, has fallen to 2.3% and 0.3% on a year-over-year basis compared with 5.5% and 4.0%, respectively last year, according to the U.S. Bureau of Labor Statistics.
Based on RSM’s latest calculations, consumers have between $400 billion and $1.3 trillion of excess savings, the majority of which resides with upper income consumers, who account for more than 60% of monthly spending and should provide ample ammunition for shopping in the holiday season and into next year.
In addition, many consumers continue to have the benefit of a strong labor and wage market based on the 3.9% unemployment rate in October and average hourly earnings growth of 4.1% in the same period, according to the BLS. This labor market provides many consumers, especially those unable to use excess savings, confidence to spend through the remainder of the year. While survey data indicates consumers are broadly pessimistic about the state of the economy, that has not stopped spending since the start of the pandemic.
Don’t expect discounting to drive all spending activity
As opposed to the robust discounting ahead of last year’s holiday season because of elevated inventories, consumers should not anticipate a similar level this year. Over the course of the last 18 months, companies have taken steps to better align inventory levels to forecasts.
As shown in the chart above, while most retailers have approached the holidays in a better inventory position, wholesalers, most notably apparel companies, continue to struggle with higher than needed inventory levels. This may drive additional promotional activity from those companies, or could provide a safety net in case retail sales exceed estimates and November and December see significant retailer reorders.
We anticipate many of the deeper discount offers will be reserved for loyalty members as companies work toward accumulating as much consumer data as possible. The value of consumer data is becoming increasingly important for businesses, so we can expect loyalty programs to be a focus of discounts, free return offers or other strategies.
Given the expense to companies for returns and the attention on margins, many businesses are pulling back on free return options for all consumers. But using loyalty programs to guarantee free returns will likely be one way that many companies can obtain important consumer spending data.
Goods or services?
As shown in the chart above, since the start of the pandemic, consumer outlays on goods has far exceeded pre-COVID trends; it remains to be seen whether that trend will continue through the holiday season. Even as spending on certain discretionary categories softens, real spending (adjusted for inflation) remains above pre-COVID trendlines.
On the services side, namely travel, information provided by the Transportation Security Administration continues to show strong domestic airline check-ins as the seven-day moving average as of Nov. 1, 2023, was approximately 5% higher than the same period in 2019. Given public statements by travel company executives indicating business consumers have not yet returned to the road at the same levels as before the pandemic, this seems to indicate check-ins are likely driven by higher leisure travelers than in 2019. We believe any notable pullback in retail spending this year would likely be offset by service spending as consumers continue their revenge travel through the remainder of the year.
There are headwinds, most notably for lower income consumers
Rising credit card rates, auto loan delinquencies and the resumption of student loan repayments (which we estimate will only have a modest impact on spending) has been used to predict consumer spending could soften this holiday season. While these are headwinds that could affect consumer spending, the impact is likely to be concentrated to the lower two quartiles of consumers who do not maintain the same level of excess savings as top income earners.
That is not to say financial pressures for these consumers should be ignored; in fact, the opposite is the case. Companies must understand the buying power of their core consumer, not only to drive holiday sales, but also to drive sales into next year and beyond.
Those consumers under the most financial pressure will be strategic in their spending, but are unlikely to completely shut off spending during the holiday season. Consumers traditionally stop spending when they have to and not when they should. While some consumers should reevaluate discretionary spending in the near term, we expect that any reevaluation of spending is likely to occur early next year and not during the holidays.
This post is the first in our series on holiday shopping business insights. Look for our next post and check out additional retail insights.
