Monthly Economic Review: November 2022

Consumers remain steadfast going into holiday season
2022 November Monthly Economic Review

This holiday season is anything but typical. There are many factors impacting our holiday forecast, but business conditions are 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 steadfast in their spending and remain in the driver’s seat. The latest figures show the economy is holding together better than may have been expected. Economic growth rebounded over the summer as gross domestic product rose by 2.6% in the third quarter, a healthy increase that should override any remaining fears that the economy is in a recession.

Consumers’ willingness to spend has been clearly impacted by inflation but their ability to spend during these difficult times has been supported by job growth, rising wages and tapping into savings accumulated during the pandemic. September consumer spending rose 0.6%, which underscored that demand remains strong and can be expected to continue.

NRF’s forecast anticipates that holiday sales will grow between 6% and 8% over 2021 to between $942.6 billion and $960.4 billion. This year’s forecast follows last year’s extraordinary 13.5% growth driven by pandemic factors and is still well above the 4.9% average over the past 10 years. The numbers include online and other non-store sales, which should increase between 10% and 12% to between $262.8 billion and $267.6 billion.

Continuing a trend begun in the last few years, major retailers kicked off the holiday shopping season early with special buying events in October rather than waiting for Black Friday. That could result in spending being pulled forward but deals and promotions are likely to continue in November and December. That’s when consumers still do most of their holiday shopping, but expanding the season provides more time to shop and is likely to result in more total spending.

Retailers prepared for early holiday shopping by hiring thousands of temporary seasonal workers as early as October and we expect them to hire between 450,000 and 600,000 in total. That’s down from 670,000 last year, but many of last year’s temporary hires became permanent during the current labor shortage. There were 800,000 job openings across all retail sectors in August, and retailers have had to compete not just with each other but with other industries for the best talent in a tight labor market that has more jobs available than people seeking to fill them.

The labor market has cooled but employment growth remains strong, and employers will likely continue to hire as we move into the next few months. Steady job gains tend to offset any pullback in spending by those already employed.

Strong job and income growth, abundant cash and available credit are positive factors contributing to the prospects for holiday sales growth.    The third-quarter Employment Cost Index from the Bureau of Labor Statistics, which measures wages and salaries, was up 5% on a yearly basis.

Households across the income range continue to have a buffer of excess savings to navigate higher prices. Economists at the Federal Reserve estimate that excess savings built up during the pandemic remained at about $1.7 trillion in mid-2022. Although this stockpile is dwindling, it is still likely providing support to current household finances.

Households are not overly leveraged and are certainly a far cry away from what took place leading up to the Great Recession of 2007-2009. They have added to their outstanding credit balances but as a share of disposable income those balances remain near a historical low. Moreover, the debt service ratio is well under control.

Everyone is talking about inflation, yet inflation is not simple to measure. The Fed’s preferred measure –the Personal Consumption Expenditures Price Index – climbed 6.2% year-over-year in September. That was two percentage points lower than the more widely cited Consumer Price Index, but the number is nonetheless running at an uncomfortably hot pace for the Fed, which increased interest rates another three-quarters of a percentage point this week in its continuing efforts to bring inflation under control.

Holiday travel is expected to be up this year. Consumers generally purchase new outfits for travel occasions along with food and items they take with them as gifts, which could be a positive for retail sales even as some spending is diverted to eating out, gasoline and airline tickets.

While retailers face a multitude of challenges, one is totally out of their hands. Weather, as always, plays a role in holiday retail sales. Its effect is difficult to quantify because it can make it both easier or harder for consumers to get out to shop while also influencing what they want to buy. Sales of coats and sweaters, for example, have gotten off to a slow start this year due to unseasonably warm weather.

Weather is also tied into energy costs, and higher energy prices could push up inflation and dampen holiday spending. Consumers have already been paying more for gasoline this year, and heating and electricity costs could rise this winter, but natural gas prices have fallen more than 40%, reducing the risk of wallet-busting heating bills. The National Oceanic and Atmospheric Administration is forecasting warmer-than-average temperatures for the Southwest, Gulf Coast and Eastern Seaboard, which cover a large swath of the U.S. population, but wetter and snowier conditions are expected for parts of the northern tier.

Past issues

GDP Growth is Slower But Consumer Spending Remains Positive
 
GDP isn’t likely to grow as much in the fourth quarter as the third, but consumer spending should remain strong.
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Monthly Economic Review: December 2022
 
Economy holding up in late 2022 but slower as it moves to finish line.
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Consumer Fundamentals Counter Inflation in Holiday Forecast
 
NRF balanced high inflation and rising interest rates against strong consumer fundamentals in its 2022 holiday forecast.
Read more