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Retailers Should Expect A ‘Ho-Ho-Hum’ Holiday 2022

The National Retail Federation just released its Holiday 2022 forecast predicting that November and December retail sales will advance between 6% to 8%. This comes on the heels of a 13.5% increase last year. Its forecast excludes automobile dealers, gasoline stations and restaurants.

Recognizing that last year broke all historical records, NRF president and CEO Matthew Shay called out the average 4.9% increase seen over the past decade to declare, “Consumers remain resilient and continue to engage in commerce.”

NRF chief economist Jack Kleinhenz added:

“NRF’s holiday forecast takes a number of factors into consideration, 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 steadfast in their spending and remain in the driver’s seat.”

I’m no economist, but I can add and subtract. If inflation is running at an annual rate of about 8%, that effectively balances out any gains NRF is forecasting. And if retail can just hold onto the 13.5% increase it realized last year, that would be a win.

As the nation’s leading retail trade association, it needs to put the most positive spin possible on its forecast. We can’t fault the NRF for that.

But it’s convenient how it used the decade’s average 4.9% holiday growth to compare this year’s forecast favorably. Inflation wasn’t a factor over that period when it most certainly is this year.

Net/Net: retailers are in a precarious position looking at the last two months of the year. If they haven’t done their numbers so far this year and kept ahead of inflation, it is doubtful that the next two months will make up for the shortfall.

NRF’s Glass-Half Full View

In a nearly hourlong press briefing, Shay and Kleinhenz took reporters through the forecast’s underlying assumptions, with Kleinheiz qualifying the presentation, “This holiday season is anything but typical.”

Full disclosure: I wasn’t invited to the briefing, but listened to the recording.

Spending Stratified By Income

At the household level, its survey shows consumers will spend $832 on average for gifts, decorations, food and other holiday-related purchases, which is in line with the average over the past ten years. But factoring in inflation, that could represent nearly a $70 decline in holiday-related spending.

The NRF also expects higher-income households to make up for losses by middle and lower-income households, with Shay noting higher-income households will spend “significantly more” on discretionary holiday-related purchases.

By contrast, lower-income households are “feeling more pressure when it comes to inflation as they’ve had to use more of their monthly income to meet expenses associated with housing, rent, energy and food costs. They are focusing on necessities.”

Noting that “behavior and spending at higher levels continue to be robust,” Shay remained optimistic.

“Consumers and households at slightly lower levels, even in the face of the challenges, remain durable and resilient…quite impressive,” he said.

Break The Piggy Bank Or Charge It?

When the household budget can’t stretch for holiday extravagancies, Shay said consumers will “supplement spending with savings and credit 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 percent of disposable income dropped by more than half from last November and December, when it was over 7%. It stands at 3.1% in September, the most recent NIPA Table 2.6 reports.

And putting holiday purchases on credit is no cushion at all. Consumer debt has reached record highs, according to the most recent Federal Research Consumer Credit report.

Further, credit card debt is now level with pre-pandemic December 2019. Balances are up 9% from this January and 23% higher than at its pandemic low in April 2021, according to the Wall Street Journal.

Which Inflation?

On the question of inflation, economist Kleinhenz pooh-poohed the Consumer Price Index (CPI) out of the Bureau of Labor Statistics in favor of the personal consumption expenditures price index (PCE) from the Bureau of Economic Analysis.

“Everybody’s talking about inflation. It’s not a simple thing to talk about or measure,” he said. “We already noted the CPI was above 8%, but the Feds’ preferred measure is the personal consumption price index. I like that index because you [can] take out foods, motor vehicles, and gasoline and [we find] retail price [increases] for the most part have been between 4% to 5%.”

Economists and the intelligencia may 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
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News search found some 700k hits on “CPI inflation 2022” compared with just over 51k swapping in PCE. And consumers can’t conveniently breakout their spending by category, but have to pay it all when it comes due.

Even when pressed by MarketWatch reporter Bill Peters about the effect of higher prices on retail sales, Kleinhenz doubled down on the PCE.

“A portion of our increase is going to come from higher prices, but not the strangling price raises that are occurring in motor vehicles, gasoline and energy as we go forward this holiday season.”

The problem is consumers are going to have to pay for other necessities that have incurred the greatest price increases, leaving less money to go to retailers.

Consumer Confidence Is Eroding

While people can argue about which inflation index is better – the CPI or PCE – the only opinion that matters is the consumers. For that, we have to look at other indices entirely, like the Consumer Confidence Index.

“Consumer confidence retreated in October, after advancing in August and September,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers’ expectations regarding the short-term outlook remained dismal.”

Like a drop in barometric pressure signals a storm is brewing, the Expectations Index is reading below 80, “ a level associated with recession — suggesting recession risks appear to be rising,” she reported and continued:

“Notably, concerns about inflation—which had been receding since July—picked up again, with both gas and food prices serving as main drivers. Looking ahead, inflationary pressures will continue to pose strong headwinds to consumer confidence and spending, which could result in a challenging holiday season for retailers.

“And, given inventories are already in place, if demand falls short, it may result in steep discounting which would reduce retailers’ profit margins.”

On one measure, we all can agree. “We know consumers continue to be emotionally invested in the holidays,” Shay said.

But how that emotional investment will express itself in retail over the next two months is up for debate.