Consumer Spending: How Are the Holidays Shaping Up?

Jason Stipp: I am Jason Stipp for Morningstar. We said several times the consumer is the majority of the U.S. economy, and a big part of consumer spending is holiday spending. So, how is this holiday season shaping up? Here to offer his insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: The shopping season, there has been a little bit of gloom around it from some corners. Some retailers are expecting a disappointing shopping season. But you also look at some data from the National Council of Shopping Centers, and it seems to indicate that we will have a slightly better holiday shopping season this time around?

Johnson: Not greatly so, but they are looking at kind of 3.4% growth, and that's compared with 3% a year ago. And they are claiming that last year's 3% was deflated just a little bit because of Hurricane Sandy, so that's part of the reason that we'll look a little bit better this year.

Stipp: The comparable-store sales are a little bit easier because there were some headwinds last year. How did the first few days of the shopping season, the "Black Thursday" now through Cyber Monday shape up compared with last year?

Johnson: I think "Brown Thursday" now, I guess, is the terminology, and then on Friday it is Black Friday. Then we got Cyber Monday. But kind of going through that period of Thursday through Sunday, anyway, sales were down a little bit, they were off about 2% from the same period a year ago. Traffic was actually up, but the amount of spend per person in the store was down a little bit. That's how the mix came about.

Stipp: Why do you think we saw that slower start than maybe you would have expected?

Johnson: I think there were a few things there. I think because of the way Hanukkah fell on Nov. 28, which was even before we got to Black Friday, and the fact that just because the holiday started so late--this was the latest that Thanksgiving can fall on the 28th, that's the last possible day that it can be. And therefore for people who had to go away or mail packages to people overseas or so forth, the shopping has to happen before that. And that probably slipped into some of the earlier weeks, and so that probably artificially depressed the numbers just a little bit for the start.

Keep in mind, too, everybody likes to look at the Black Friday numbers, but it's only about 21% of the holiday sales--that is November and December combined--that period is only 21% of the total. It's not terribly predictive of the rest of the season; it's got very bad track record.

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Stipp: Let's talk about some of the gainers and losers that we expect to see by category. What do you think is going to sell well this holiday season?

Johnson: Well, I am going to give you two different answers on that in a way. Certainly, clothing and general merchandise both we expected to grow faster than the 3.4% overall number. Unfortunately, the forecasts, the way they're broken out, I only have electronics in total which combines software, computers, tablets, and TVs all in one bucket, and that's only expected to be up 0.5%. So, that's going to be kind of a laggard in terms of the total sales dollar, but it will capture an awful lot of interest. One of the big problems there is TVs have begun a saturation issue and the pricing issues on many categories with the prices falling so quickly, that always keeps a little bit of a lid on those prices.

The good news is when we calculate gross domestic product, the numbers get bumped up a little bit because of the deflators. But I do expect the electronics category to have three things to do well and to dominate the market, and that's iPads, iPhones, and the new Xbox and Sony game stations which are all new this year, which will kind of take some of the spending away from some of the other categories this year.

Stipp: What about online versus the brick-and-mortar shopping?

Johnson: Online continues to take share. One of the readers asked a question this week about that. The International Council Shopping Center does publish the data, and they're projecting that online sales will amount to about 14% of the total this year. That will be up from about 13% a year ago.

If you go way back to 2002, it was probably as low as 6%, which by the way included mail-order sales as does the current number. So, one is taken away a little bit from the other, so it's not all taking from the brick-and-mortar.

Stipp: Gift cards have been a big component of holiday shopping in the past, but they are counted a little bit differently when sales actually happen. What's the deal with gift cards this year?

Johnson: Gift cards are only counted, as always, when they are actually used. So, if you purchase a gift card and give it, until that you actually into the store and redeem it, it's not counted as a sale. That's been a big deal in past years. That may have affected last year's numbers a little bit, too. Gift cards last year were an astounding 23% of holiday purchases, which is just a huge number, it's the biggest in history. That number had gone from 14% or something like that, just four or five years earlier. It's just a huge boom in interest in those gift cards. That tended to defer the sales until after the holiday season.

Now, what's interesting this time, at least according to a survey that the council did, there is much less interest in gift cards this year. They're projecting at most they will be 20% of sales. So, that's really quite a shift.

Stipp: What that means is that we might see those sales happening on real items, which will get counted during the holiday shopping season, but maybe January won't look quite as good if there are fewer gift cards being spent?

Johnson: Correct.

Stipp: What about the idea? You mentioned that some shopping might have happened earlier, but that we have a shorter or more compressed holiday shopping season. Is that going to be a headwind at the end of the day?

Johnson: I think a lot of people were very, very worried about that. That's going to turn out to be both a blessing and a curse, I think. But, overall, the Shopping Center Council has done the work on that, too. They said, if it's the 26-day or the 32-day holiday period, it really doesn't make all that much of a difference. There is a small correlation. If you have a few more days it might make the numbers a little better, but not even in every case. You may have more shopping days and fewer sales. There are other things that are bigger drivers of the sales than how many days you have. People managed to cram it into a shorter period of time, I guess.

Stipp: You mentioned and we've written about soft patches in consumer spending throughout this year, do you think that retailers saw some disappointing numbers earlier in the year and are forecasting somewhat dour-looking retail sales for the holidays?

Johnson: I think they did. You've got to consider that it's a trade organization. But they felt that a lot of those forecasts are a little bit too dour and that maybe it won't be quite as bad a holiday season as people think. I have talked about the possibility of a lot of bargains out there, especially if you aren't selling an iPad or an iPhone or something like that. But the council seems to think that inventories are very tight because everyone went into this season thinking it was going to be a crummy holiday season and that there may not be actually as many discounts as people were expecting.

Stipp: You said that the total dollars that are spent on holiday gifts should be higher than those of last year, but do you think that the economic impact will be the same magnitude higher?

Johnson: That's a hard call. But, I mean, obviously, I think, a bigger percentage of the revenues end up in this country if it's an iPhone or an iPad or even an Xbox, than if it were, say, a piece of clothing which almost surely comes from overseas. There may be a small positive bias from the mix this year.

One other interesting bias that came up: The car sales were just released a few minutes ago. And the auto sales set a new record for the year at 16.4 million units, that's a preliminary number, so it's subject to revision here. But that would be one of the best numbers we've seen, and it would tend to indicate that maybe people were out shopping for a car instead of for a piece of clothing over the weekend.

Stipp: Last question for you. You mentioned that, if we looked at holiday shopping growth earlier in the early 2000s, we would see a number a lot higher than what we're seeing right now.

Johnson: Yes.

Stipp: Do you think we're seeing a secular shift where consumer spending is just going to be under pressure for a while, or do you think we'll be able to see growth in the 4%, 5%, and 6% range for holiday seasons anytime in the near future?

Johnson: I think, like everything else, that we're going to have a slow and steady recovery. Unfortunately, I don't think we're going to fully get back to those 6% to 7% growth rates with slow employment growth out there, and certainly not full participation by everybody in the economy in the recovery. Those are all things that are hurting the numbers unfortunately. So, I am a little worried that we won't get back to those bigger numbers, but I think we can sustain something we've kind of had four years in a row. We've been right around that 3.5%-4.0% mark, and this year seems to be another year of the same to me.

Stipp: Bob, holiday shopping season is very important consumer spending. Consumer spending is very important, of course, to the U.S. economy. Thanks for joining me and for your insights.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.