Retailers and the consumers on whom they depend are rushing headstrong into the holiday shopping season, facing a level of economic uncertainty that they haven’t experienced since 2007, right before the Great Recession hit.
VUCA – volatile, uncertain, complex and ambiguous – is the watchword for how retailers must approach this holiday season and 2024 after that.
If retailers keep their expectations low, they might be surprised. But they can’t take their foot off the gas because this holiday might just be the last hurrah before things take a turn for the worse, much worse.
The Past Informs The Present
Back in 2007, the National Retail Federation projected a 4% rise in November-December retail sales. At the time, the NRF said expectations were below the ten-year average of 4.8% and acknowledged the weak housing market and credit crunch as tempering holiday shoppers’ plans.
The 2007 holiday shopping season ended on a positive note, with retail sales up 3%, but the NRF said that economic pressures caused the sales climate to deteriorate during the season.
Consumers this year are facing a similar weak housing market – sky-high interest rates are keeping people out of the market.
And consumer credit has reached a breaking point. According to the New York Federal Reserve, credit card debt reached an all-time high of $1 trillion earlier this year and nearly 60% of consumers are worried about their ability to get more credit.
Complicating the outlook further is the New York Fed’s finding that nearly 14% of consumers expect they could lose their jobs next year. The latest jobs report showed job growth is slowing and unemployment is on the rise, giving credence to the Wall Street Journal’s headline, “Sharp U.S. hiring slowdown signals cooling economy ahead.”
In addition, U.S. households took an income hit in 2022, with median income dropping 2.3% from 2021, more than double the 1% decline from 2006 to 2007.
Then there’s the specter of inflation that consumers didn’t have to contend with in 2007 when the inflation rate averaged 2.8%. Through September this year, inflation is averaging 4.4%, well below the 8% in 2022, but still, it adds up to prices that are significantly higher than they were in 2021.
Hanging over it all is the rising tensions on the world stage with Ukraine and Israel at war and the danger that the conflict in the Middle East could escalate further. Back in 2007, the U.S. military was still involved in Iraq and Afghanistan, but the initial shocks from the mounting tensions had passed. That is surely not the case this year, especially concerning the Middle East.
All in all, things look just as bad, if not worse, than in 2007 before the economy took a nosedive.
Pushing Forward
The National Retail Federation is hedging its bets after missing its 6% to 8% increase projected last year when sales advanced 5.3%. This year, it is projecting that November and December retail sales will advance between 3% and 4%, slower than the past three years, but still in line with the average 3.6% increase from 2010 to 2019.
As expected from an association that’s the nation’s cheerleader for the retail industry, NRF president and CEO Matthew Shay put a positive spin on the forecast.
“In spite of the uncertain economy and the challenges households are facing, we’ve seen strength and resilience across the consumer sector,” he said during the press briefing, as he added, “ Retail sales have now grown year over year for 41 consecutive months. That’s every month since May of 2020.”
Stressing that spending decisions are based equally on financial ability as much as emotion and tradition, the NRF is counting on the emotional factors to outweigh consumers’ practical considerations when it comes to holiday shopping this year. And in that, Shay may be right. We all need a little more cheer, given the state the world is in right now.
Muddying The Waters
Following Shay’s remarks, NRF chief economist Jack Kleinhenz took the stage and acknowledged the many VUCA factors impacting the holiday forecast.
“Over the last few years, holiday shopping season has been filled with unmatched peculiarities for consumers and retailers alike. And this year, there’s a whole new set of dynamics in place,” he said.
But his forecast tended to favor the recent past’s consumer spending tailwinds over the growing economic headwinds. “So beware, there could be some changes to these factors. There are mounting threats – headwinds – and they remain in place. But fortunately, I don’t believe they are increasing.”
Kleinheiz’s glass-half-full versus half-empty perspective is particularly evident in how he parses the impact of inflation. He favors the Personal Consumption Expenditure (PCE) index published by the Bureau of Economic Analysis over the Consumer Price Index (CPI) from the Bureau of Labor Statistics. And he looks at PCE inflation specific to retail prices of a basket of goods, not across consumers’ entire monthly expenditures.
When asked by a reporter about inflation’s impact on the retail forecast, he said, “If you look at the PCE price index for retail that came out last week, retail and food services combined was only 1.3% year-over-year. And now I can start to take out gasoline and food services, we see prices somewhere in the range of a half-percent to 1%. And it’s been coming down for the last three months. So I think retail price chain is sizeably lower than the PCE price index.”
His answer supports the assessment that the 3% to 4% retail growth forecast is not significantly impacted by inflation; however, it doesn’t account for the overall impact of inflation on the consumers’ ability and willingness to spend during the holiday season.
He added, “But spending has come down in the last few months on a year-over-year basis on the retail numbers that we publish. So I think there’s a bit of momentum that’ll carry us in a positive direction, but also at a slightly slower pace than what we had seen earlier this year.”
Ultimately, the NRF retail forecast hinges on whether consumers live up to their expectations to spend on average $875 in retail for their holiday celebrations, including $620 on gifts and $255 for other sesonal items like decorations, candy and food. That would represent a 5% increase over the $833 they planned to spend on holiday last year.
What They Say Versus What They Do
There’s no lack of consumer holiday surveys to choose from besides NRF’s conducted with Prosper Insights and Analytics.
Deloitte’s shows a 9% uptick in gift spending but found gift spending will come in at a lower level, $554, than NRF’s. It also includes a wider range of spending categories including non-gift clothing purchases, home furnishings and holiday decorations. That is expected to increase by 25% to $466.
And Deloitte also includes experiences like restaurants and entertainment where spending could increase 10% year-over-year to yield a total holiday-related spending uptick of 14% over last year, from $1,455 to $1,652.
Contrast that with Accenture’s, which shows a 5% decline in planned holiday shopping with an average spend of $591. Only one in five (17%) of consumers surveyed feel optimistic about their financial situation going into the holiday season.
As a result, over two-thirds (67%) will be cutting back on gifts to close family and friends. And over half (52%) have already agreed or plan to not exchange gifts with other adults this year.
Accenture
ACN
“We’re not saying people won’t spend; they will, but it’s going to be in a different way,” shared Lori Zumwinkle, Accenture senior managing director and North America retail lead.
She points to more shoppers (66%) waiting to start their holiday shopping. For example, only 26% said they’d started shopping in August, compared with 42% last year. And a majority of people this year (52%) plan to buy materials to make gifts, both as a cost-saving measure and a way to put more meaning into the gifts they give.
Gift cards will be the number one gifting choice this year so recipients can put the money toward purchases they need to make. And 39% will intentionally choose gifts that people can enjoy throughout the year, like board and video games.
Zumwinkle was surprised that the survey results showed such a sharp drop in planned spending. “This is the first year in a long time where we’ve seen a reduction in predicted spending,” she said, adding that Accenture has conducted its survey for the past 17 years.
“It’s so nuanced, so changeable. One minute, it looks like sales are doing well and then something happens and it doesn’t. It’s going to be an interesting holiday, so retailers will need to display ever greater levels of agility and responsiveness as they navigate challenging headwinds,” she concluded.
History Repeats Itself?
With the U.S. economy so dependent on retail performance and retailers depending on holiday spending to bolster their year-end performance and reserves going into the new year, a lot is riding on how well consumers hold up this holiday season. And that remains a big question.
The Conference Board just announced that its October Consumer Confidence Index fell for the third month in a row. “Expectations for the next six months stayed below the recession threshold of 80, reflecting a decline in confidence about future business conditions, job availability, and incomes,” The Conference Board’s chief economist Dana Peterson said in a statement.
“October’s retreat reflected pullbacks in both the Present Situation and Expectations Index,” she continued, citing consumers’ concern over rising prices in general and for grocery and gasoline prices in particular. They also expressed concerns about the political situation, higher interest rates and worries about the recent turmoil in the Middle East.
While NRF’s Kleinhenz recognizes the headwinds, he remains firmly on the side of the 50% of economists that the Wall Street Journal polled recently who don’t expect a recession in the foreseeable future.
“So we did not expect the recession this year. We felt that the economy was still pretty strong. We are seeing, expecting some slowing in the economy right now,” Kleinhenz said. “There’s a lot of issues right now that need to be sorted out, whether it be monetary policy, fiscal policy, and even geopolitical events. We’re just seeing a softer pace than what we’ve seen, but yet I’m not in that recession camp for 2024.”
On the positive side, NRF may well realize its holiday growth forecast between 3% and 4%, just like holiday 2007 showed an increase before the bottom fell out in 2008.
But after the 2023 holiday, all bets are off about prospects for 2024. History may well repeat itself.
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