Christmas in October?
Ships that stole Christmas
Retail sales were much stronger than expected across the board in September, putting an exclamation mark on a powerful Back-to-School (BTS) season. Spending from June through September 2021 rose 15.9% on a year-over-year (y/y) basis and by 19.8% versus BTS in 2019. That compares with y/y increases in those four months ranging from 3.4% to 5.1% over the previous four years.
Holiday spending for Christmas and Hanukkah started in earnest a fortnight ago, largely due to the well-publicized supply-chain outages, a fear that similarly drove strong BTS spending in early summer. No one wants to put an “out-of-stock” notice in their kid’s stocking on Christmas morning, but that’s a real possibility given the port backlog issues on the West Coast. While we generally expect Christmas spending to be solid, there are numerous additional headwinds on the horizon, such that sales may not be as robust as the recently completed BTS season. These headwinds include soaring energy prices, sustainably higher inflation, Covid-related concerns, a declining savings rate, tepid confidence levels and the potential for higher tax rates out of Washington.
Deloitte is forecasting a relatively solid 7-9% overall increase in Christmas sales in 2021, compared with a range of 2.7% to 5.3% for the September through January periods over the previous four holiday seasons. Deloitte also expects e-commerce sales to rise by 11-15% this year, compared with a much stronger 34.8% gain last year.
Lots of finger pointing with port backlog A record 73 cargo ships, which can each hold 1,000 or more containers, were stacked up outside of the Los Angeles and Long Beach ports last month. Those two ports account for about 40% of U.S. shipping volume, and the backlog had doubled from August. This logjam worsens the growing supply-chain bottleneck, leaving retailers with bare shelves ahead of the critically important holiday shopping season.
Longshoremen are now adopting a 24/7 work model to help alleviate the bottleneck, up from two shifts per day for six days each week. But they caution that implementing this work schedule will not solve the problem. We’re short an estimated 40,000 truck drivers to move the containers from the docks, and we’re similarly short rail workers and warehouse employees. As a result, the supply-chain outages could last well into mid-2022 or later, which could certainly impair Christmas sales. Major retailers such as Walmart, Target, Costco Wholesale and Home Depot have chartered their own ships to help resolve the problem, but they are also likely to pass their higher shipping costs onto us in the form of higher prices.
Energy prices soaring As a result of recent policy decisions in Washington, natural gas prices have quadrupled over the past year, crude oil has more than doubled, and gas prices at the pump are up 50% and rising. We’re expecting a brutally cold winter for the fourth time in the last five years, so these prices should continue to rise. This crowding out will result in less disposable cash and reduce discretionary spending.
Sustainable inflation remains elevated The core wholesale Producer Price Index (PPI) hit a record high of 6.3% y/y in August, although it eased to 5.9% in September. The core Personal Consumption Expenditure (PCE) index (the Fed’s preferred measure of inflation) hit a 30-year high at 3.6% y/y in June, July and August, which is well above the Fed’s 2% target. The nominal retail Consumer Price Index (CPI) rose to a 13-year high of 5.4% in September, and core inflation hit a 30-year high of 4.5% y/y in June, although it did ease to 4.3% in July and 4% in August and September.
We remain concerned about high and rising costs for food, energy, housing and labor. Companies have passed on rising inflation to their end customers in the form of higher prices, which could begin to impact demand.
Personal savings rate falling The personal saving rate averaged 6.7% over the last 25 years, but it spiked from a one-year high of 8.4% in February 2020 before the pandemic to a record 33.7% in April 2020, due to direct payments and generous unemployment benefits from the CARES Act and the American Rescue Plan. More recently, the personal savings rate has slowed further from 26.6% in March 2021 to 9.4% in August 2021. So, the ability of consumers to afford rising prices may soon wane.
Business and consumer confidence have declined:
- Michigan Consumer Sentiment Index surged to a 1-year high of 88.3 in April 2021. But results plunged over the last six months to a weaker-than-expected 71.4 in October.
- Conference Board’s Consumer Confidence Index rebounded to a stronger-than-expected, 16-month high of 128.9 in June 2021. But results have slowed sharply over the past three months, to 109.3 in September.
- National Federation of Independent Business (NFIB) small-business optimism index rebounded to an 8-month high of 102.5 in June 2021. But results have fallen to 99.1 in September.
Delta peaked last month The Covid-19 delta variant peaked around Labor Day and has rolled over in 40 states. Those 12-18 years old are now approved to receive the vaccine, with approval expected for younger children (5-12) before year end. But we’re watching closely to see if other Covid variants fill delta’s void in November and December.
Labor market recovering Initial weekly unemployment claims plunged 95% over the past 19 months, from their peak at 6.15 million claims in April 2020 to a new cycle low of 293,000 yesterday. With 10.4 million job openings in August, we expect the labor market to continue to improve, which should boost consumer spending.