Orlando's Outlook: Consumer spending accelerates into Christmas

12-15-2017

Bottom line The Commerce Department this week reported that November retail sales rose by a sharply higher-than-expected 0.8% on strong electronics and internet sales, and September and October sales were revised up across the board. So in the wake of hurricane-impaired sales in August, which actually declined by 0.1%, the consumer has rebounded with a vengeance. So-called “control” results (which strip out autos, gasoline, building materials and food service) have surged by 6.6% on an annualized basis over the past quarter, marking the strongest such pace since June 2014.

With Hanukkah already here and Christmas rapidly approaching, this resumption in consumer strength is coming at exactly the right time, driven by a solid labor market, rising consumer confidence, the prospect for significant tax reform, and a burgeoning wealth effect buoyed by a 28% rally in the S&P 500 over the past 13 months. Because consumer spending accounts for 70% of GDP, we remain confident in our constructive fourth-quarter GDP estimate of 3.2%, compared with only 2.7% for the Blue Chip consensus.

Back-to-School (BTS) sales remain a good barometer for holiday spending Christmas historically tends to be 80-90% positively correlated with BTS results, excluding any weather-related issues. In 2017, BTS spending rose by 4.1% in July, August and September on a year-over-year (y/y) basis, the strongest results since 2014’s 4.8% gain. By comparison, BTS rose a more muted 2.6% in both 2016 and 2015.

So, what does that augur for Christmas 2017? The National Retail Federation (NRF) is forecasting a 3.6-4.0% sales gain for 2017, which it measures by looking just at November and December spending levels. In sharp contrast, our research friends at the Telsey Advisory Group have a much more constructive 4.7% holiday forecast. 

Here at Federated, we’ve been hoping retail sales will come in at the high end of a 3.5-4.5% estimated gain. But importantly, we look at the full three-month period that includes January because of the importance of post-holiday gift-card redemptions. Gift cards only count as a retail sale when redeemed, not purchased. About 15% of gift cards typically are redeemed the week after Christmas, and 60-65% are usually redeemed during January. So January gift-card redemptions will help determine the overall strength or weakness of the holiday season. 

A strong and improving labor market is helping fuel solid holiday spending trends

  • Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Dec. 9 fell to 225,000, just off a 44-year low of 223,000.
  • November’s unemployment rate (U-3) was unchanged at 4.1%, its lowest level since a 3.9% in December 2000.
  • November’s average private workweek for all employees ticked up to 34.5 hours after being stuck at 34.4 hours for four consecutive months. An increase of 0.1 hour worked is the equivalent of adding an estimated 350,000 or more jobs to the economy.
  • November wage growth rose by 2.5% on a y/y basis, up from 2.3% in October.

Consumer confidence remains strong:

  • Conference Board leading indicators have now been positive for 14 consecutive months, soaring 1.2% in October to 130.4, a new 58-year cycle high.
  • Conference Board consumer confidence surged to a new 17-year high of 129.5 in November, up from a 3-month low of 100.8 in October 2016.
  • Michigan consumer sentiment spiked to a 13-year high of 101.1 in October, up from a 2-year low of 87.2 in October 2016, although it has since slipped to 96.8 in its preliminary December reading.

Rising wealth supports strong holiday sales Asset prices in the U.S. are rising on a broad range of factors: increasing consumer and manufacturing spending; an improving trade balance on solid foreign demand and the relatively weak U.S. dollar; the strongest domestic economic and corporate earnings growth in three and six years, respectively; and the prospect for significant tax reform for the first time in 30 years. The S&P 500 has soared by 28% to an all-time high over the past 13 months, and the top half of America owns stocks in their retirement and college-savings plans. Moreover, the top two-thirds of Americans own their own homes, which also have benefitted from rising real estate prices.

So this growing wealth effect is helping to spark stronger holiday spending. Our research friends at Evercore ISI note that over the past 20 years, there has been an 85% correlation between S&P performance in the fourth quarter and holiday sales. With the equity market up by about 6% so far in this year’s fourth quarter, its model suggests Christmas retail sales could rival 2011’s powerful gain of 6.3%.

A Charlie Brown Christmas tree? For the past 15 years, ISI has gathered data from 24 regional Christmas tree associations, farmers and retailers in the U.S. and Canada during each week between Thanksgiving and Christmas to gauge the relative strength or weakness of the sale of Christmas trees, wreaths and garlands. Its underlying investment thesis is that if consumer confidence is high and the economy is strong, then people will likely spend more money on their holiday decorations in addition to their gifts, food, beverages and travel.

With three weeks now complete, ISI’s annual Christmas tree unit sales survey has posted a moderate average y/y sales gain of 7.6% in 2017, vs. a much stronger 10.8% gain in 2016’s first three weeks, which were the strongest results in the survey’s history. While that’s disappointing on the surface, this year is noticeably stronger than the 5.9% average annual gain achieved over the life of the survey.

But we believe that there are extenuating circumstances to account for this year’s sequential survey softness. It takes roughly 8-10 years for a Christmas tree sapling to grow and mature before its harvested. However, a decade ago during the Great Recession of 2007-2009, many smaller, independent Christmas tree farms either reduced planted acreage or simply went out of business. As a result, there was a shortage of mature Christmas trees available to be harvested this year, driving prices sharply higher by at least 15% y/y.

That may have forced many consumers to either skip buying a tree due to a lack of inventory or excessively high prices, or perhaps shift to purchasing an artificial tree. But ISI’s survey does not capture the sale of artificial trees, which means its results may not fully reflect the underlying strength of overall Christmas retail spending. This Christmas-tree availability issue may persist another year or two until the post-recession planting schedule normalizes.

Here are the details on November’s strong gain and the prior months’ revisions: 

  • The 0.8% increase in headline retail sales more than doubled the expected gain of 0.3%. October rose by a stronger-than-expected 0.5% (revised up from a preliminary 0.2% gain), while September ticked up to a powerful final increase of 2.0%, the strongest monthly gain in more than two years. As we had expected, November’s category strength was led by a 2.5% gain in surging internet sales and a 2.1% increase in electronics sales, due to Apple’s new iPhone release.
  • Ex-auto sales strong, too Auto unit sales declined by 3.6% on a month-over-month (m/m) basis to 17.35 million annualized units, and dollar volumes slipped by 0.2%. As a result, November core retail sales, which strip out these poor auto results, rose 1.0% on a m/m basis, well above the 0.6% expected consensus gain. October was revised up to a gain of 0.4% from a preliminary gain of 0.1%, and September was revised up a tick to a final gain of 1.3%.
  • Ex-autos & gas drive higher Unleaded gasoline prices rose by a penny nationally to about $2.49 per gallon during November, although gasoline volumes at retail stations rose by 2.8%. So adjusted core retail sales, which strip out both auto and gasoline sales, rose by 0.8% on a m/m basis, double the estimated level. October was revised up a tick to a 0.4% gain, and September was revised up by two ticks to a final 0.8% gain.
  • ‘Control group’ strength should push GDP higher So-called “control” results, which strip out autos, gasoline, building materials and food service and feed directly into the Commerce Department’s quarterly GDP calculation, rose by a stronger-than-expected 0.8% on a m/m basis, double the forecasted gain. October was revised up a tick to a 0.4% gain, and September was revised higher from a 0.5% increase to a strong final gain of 0.8%. So September’s healthy positive revision should lift third-quarter GDP higher in its final revision next week, while the stronger-than-expected control results for October and November should support our well above-consensus estimate of 3.2% Q4 GDP growth.

We wish everyone a blessed Christmas and a happy, healthy and successful New Year!

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