Can the Holiday Spending Cheer Continue?

Brett Hammond, Senior Economist

The first few days of the holiday shopping season were a boon for the retail sector – with particularly strong growth in online spending. But the early increase comes amid continued weakness in the United States economy, and we expect that spending, except on luxury goods, is likely to slow. While investors may find opportunities in the beaten-down retail sector, the early numbers should be understood in the broader context of overall performance in that sector, and are not necessarily indicators of medium- or long-term growth.

On Black Friday, overall sales are estimated to have increased 6.6% relative to last year, according to the retail analysts at ShopperTrak. If Saturday and Sunday of Black Friday weekend are added to the equation, the spending increase was 9.1% over last year, according to the National Retail Federation.

Even bigger gains were recorded online, with a 26% increase in e-commerce spending on Black Friday over last year, according to the comScore data analysis firm. That’s consistent with the trendlines in holiday season online spending, which was $167 billion last year, up from $28 billion in 2000, according to the Census Bureau. And the projected increase in online spending this year, relative to 2010, is 15%.

Some facts behind the numbers
It’s important to put these positive numbers in context, however. Here are a few reasons for tempered optimism:

First, the increase in in-store sales was likely driven, in part, by longer store hours, since some large chains opened at midnight, or even earlier. It’s well established that consumers spend more when stores are open longer.

Second, it’s also possible that the early surge in spending will tail off, as people snap up bargain items and then reach the limit of how much they’re prepared to spend in the holiday season. The National Retail Federation is projecting that the total volume of holiday sales will only be 2.8% higher than last year (a safe estimate, given that personal disposable income has risen 2.5% for the year so far). By comparison, the growth in 2010, relative to 2009, was 5.2%.

Third, the early estimates are just that – estimates. In 2008, data firms reported early growth in holiday spending, though the Census Bureau later reported a decline, according to a recent Wall Street Journal article.

Fourth, we can’t overlook current economic conditions. The 9% unemployment rate, 16.5% underemployment rate, and 2% economic growth in the third quarter do not bode well for overall holiday spending.

But there are different segments within the retail market, and we project luxury goods retailers will probably perform better than middle- and lower-end retailers. Luxury goods consumers are somewhat insulated from the economic slowdown, and they’re less likely to participate in Black Friday or Cyber Monday because discounted goods are not a big draw for them.

For investors, exposure to the retail sector can be part of a well-diversified portfolio of holdings. While the strong performance in the opening days of this year’s holiday season may provide a short-term boost for retail stocks, investors should remain cautious since the holiday season is only one part of companies’ annual sales, and the medium-term retail outlook is for more restrained growth.