The National Retail Federation has just released its forecast for the 2022 holiday season, predicting November and December retail sales will grow 6% to 8%. This follows a 13.5% increase last year. Its forecast excludes car dealerships, gas stations and restaurants.
Acknowledging that last year broke all historic records, NRF President and CEO Matthew Shay referred to the 4.9% average increase seen over the past decade to say, “The consumers remain resilient and continue to trade.”
NRF Chief Economist Jack Kleinhenz added:
“NRF’s holiday forecast takes into account a number of factors, but the overall outlook is generally positive as consumer fundamentals continue to support economic activity. Despite record levels of inflation, rising interest rates and low levels of confidence, consumers have been firm in their spending and remain in control.
I’m not an economist, but I know how to add and subtract. If inflation is running at an annual rate of around 8%, this effectively offsets any gains predicted by the NRF. And if retail can just hold onto the 13.5% increase it achieved last year, that would be a win.
As the country’s leading retail association, it needs to put the most positive spin on its forecast. We can’t blame the NRF for that.
But it’s handy how he used the decade’s 4.9% average holiday growth to compare favorably to this year’s forecast. Inflation was not a factor during this period, although it most certainly is this year.
Net/Net: traders are in a precarious position over the last two months of the year. If they haven’t done their math so far this year and stayed ahead of inflation, the next two months are unlikely to make up for the shortfall.
Half-glass view of the NRF
In a nearly hour-long press briefing, Shay and Kleinhenz walked reporters through the assumptions behind the forecast, with Kleinheiz calling the presentation, “This holiday season is anything but typical.”
Full disclosure: I was not invited to the briefing, but listened to the recording.
Expenses stratified by income
At the household level, its survey shows consumers will spend an average of $832 on gifts, decorations, food and other holiday-related purchases, which is in line with the average of the past ten years. But adjusting for inflation, that could represent a nearly $70 drop in vacation spending.
The NRF also expects higher-income households to make up for the losses of middle- and lower-income households, with Shay noting that higher-income households will spend “significantly more” on discretionary vacation-related purchases.
On the other hand, low-income households “feel more pressure regarding inflation because they have had to use more of their monthly income to meet expenses related to housing, rent, energy and to food. They focus on the necessities.
Noting that “behaviour and spending at higher levels continue to be robust,” Shay remained optimistic.
“Consumers and households at slightly lower levels, even in the face of challenges, remain sustainable and resilient…pretty impressive,” he said.
Break the piggy bank or recharge it?
When the household budget can’t stretch for holiday extravaganzas, Shay said consumers will “supplement spending with savings and credits to provide a cushion and result in a positive holiday season.”
That is, if their savings are still there. The Bureau of Economic Analysis shows that the personal savings rate as a percentage of disposable income has more than halved from last November and December, when it was above 7%. It stands at 3.1% in September, according to the latest NIPA Table 2.6 reports.
And putting vacation purchases on credit is no cushion at all. Consumer debt has reached record highs, according to the latest Federal Research Consumer Credit report.
Additionally, credit card debt is now at pre-pandemic December 2019 levels. Sales are up 9% from January and 23% from their pandemic low in April 2021, according to the the wall street journal.
On the issue of inflation, economist Kleinhenz shrugged off the Bureau of Labor Statistics’ Consumer Price Index (CPI) in favor of the Bureau’s Personal Consumption Expenditure (PCE) price index. of Economic Analysis.
“Everyone is talking about inflation. It’s not a simple thing to address or measure,” he said. “We’ve already noted that the CPI was above 8%, but the Fed’s preferred measure is the personal consumer price index. I like this index because you [can] take out food, motor vehicles, gasoline and [we find] retail price [increases] for the most part have been between 4% and 5%.”
Economists and intelligence can read the PCE, but most Americans haven’t gotten the memo.
They hear about the CPI in the news, not the PCE. A quick Google
Even when pressed by MarketWatch reporter Bill Peters about the effect of higher prices on retail sales, Kleinhenz doubled down on the PCE.
“Part of our increase is going to come from higher prices, but not from the stranglehold price increases that are happening in motor vehicles, gasoline and energy as we move forward this holiday season.”
The problem is that consumers will have to pay for other necessities that have seen the biggest price increases, leaving retailers with less money.
Consumer confidence is eroding
While people can argue over which inflation index is better – the CPI or the PCE – the only opinion that matters is that of consumers. For that, we have to look at other indexes entirely, like the consumer confidence index.
“Consumer confidence fell in October, after rising in August and September,” said Lynn Franco, senior director of economic indicators at The Conference Board. “Consumer expectations for the short-term outlook remained dismal.”
As a drop in barometric pressure signals a storm is brewing, the expectations index is below 80, “a level associated with recession – suggesting recession risks appear to be rising,” she said and for follow-up :
“Notably, concerns about inflation – which had eased since July – resumed, with gasoline and food prices being the main drivers. Going forward, inflationary pressures will continue to weigh heavily on consumer confidence and spending, which could lead to a difficult holiday season for retailers.
“And, given that inventory is already in place, if there is insufficient demand, it can result in steep discounts that would reduce profit margins for retailers.”
On one measure, we can all agree. “We know consumers continue to be emotionally invested in vacations,” Shay said.
But how this emotional investment will play out in retail over the next two months is up for debate.