Gift cards to the rescue Gift cards to the rescue\images\insights\article\credit-card-reader-small.jpg February 19 2021 February 19 2021

Gift cards to the rescue

They played an outsized role in 2020 holiday retail spending.

Published February 19 2021
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It turns out Christmas was pretty good after all. The Commerce Department reported yesterday that after three consecutive month-over-month (m/m) declines, nominal retail sales surged in January by the largest amount in seven months, rising by a much stronger-than-expected 5.3% (June saw an 8.6% m/m gain). For reasons outlined below, we define Christmas spending as stretching from October through January. With that now complete, 2020’s 4.8% year-over-year gain outstripped 2019’s solid 4.2% increase and 2018’s relatively tepid 2.9% gain.

Covid part of the mix Several factors contributed to retail sales turning on a dime in January to salvage the holiday season. Management of the coronavirus pandemic sits at the top of the list. Infections peaked Jan. 8 and have since fallen off a cliff, while the pace of vaccinations has soared from about 400,000 per day at the end of December to 1.4 million by the end of January. As a result, many states have begun to ease restrictions, providing consumers with more opportunities to spend their money.

Burning a hole in our pockets To be sure, many consumers have plenty of money to spend. While the savings rate is down from April’s record peak of 33.7% to 13.7% in December, that’s still more than double the 20-year average at 6.6%. To augment that, Congress’ $900 billion Phase 4 fiscal stimulus package passed just before Christmas provided people with a $600 stimulus check and a $400 weekly unemployment insurance bonus, on top of their normal unemployment benefits. To that point, the unemployment rate (U-3) has plunged from 14.7% last April to 6.3% in January.

Powerful wealth effect Our research friends at Evercore ISI note that over the past 21 years, there’s been a near-90% correlation between the S&P 500’s fourth-quarter performance (up 12% in 2020) and holiday retail sales. In addition, with the Federal Reserve cutting interest rates to zero a year ago, the value of residential housing has soared. With two-thirds of Americans owning homes and half owning stocks in their retirement- and college-savings plans, that positive wealth effect helped to support strong holiday spending.

The gift card X-factor Rampant concern about the surging third wave of Covid-19 infections and massive shipping delays with UPS, FedEx, and USPS sparked a significant increase in gift-card purchases this holiday season. According to InMarket, a data analytics company, gift-card purchases in early December were double the pace of 2019. By mid-December, gift-card purchases were still running 50% higher than year-prior comparables, according to, which manages electronic gift-card programs for more than 5,000 brands. The best-selling gift cards this past holiday season were Visa, Amazon, Microsoft, Kohl’s and Lowe’s. The average number of gift-card transactions rose 12.3% this past holiday season, according to InMarket, and the average shopper spent 17.6% more on gift cards in 2020.

Why is Christmas a four-month retail holiday? Because of the coronavirus, many retailers began to aggressively promote their Black Friday holiday deals at the beginning of October to create social distancing by spreading out the customer traffic in their physical stores. This pulled sales forward. Of course, November and December are prime shopping months. But we include January in our analysis of Christmas sales because of post-holiday gift-card redemptions, which only count as a sale when redeemed, not when purchased.

Much stronger-than-expected retail sales Commerce reported yesterday that nominal retail sales in January surged 5.3% m/m, well above an expected consensus gain of 1.1%; December was revised down to a decline of 1% (from a smaller 0.7% decline); November dropped 1.3%, a tick better than previously reported; and October slipped by a final 0.1%.

Control results strip out food, autos, gas and building materials and feed directly into quarterly GDP. They soared 6% in January (expected gain of 1%); December was revised down from a 1.9% decline to a larger drop of 2.4%; November improved to a decline of 0.9% from a larger 1.3% drop; and October suffered a modest final decline of 0.2%.

Getting into the weeds Housing is at a 14-year high, driving furniture and building materials to rise in January by 12% and 4.6% m/m, respectively, in January. Department stores surged 23.5%, electronics rose 14.7%, bars and restaurants gained 6.9%, and online sales leapt 11%.

Washington implications We expect the fed funds rate to remain zero bound through at least the end of 2021, despite rising nominal and core inflation. But January’s powerful rebound in consumer spending may have a sobering influence on Congress’ debate over passing President Biden’s $1.9 trillion fiscal-stimulus proposal. By mid-March, we expect a smaller spending program that is better targeted to helping lower-wage families struggling to reclaim their place in the labor market.

Frugal February? Even in the best of times, consumers tend to hunker down after Christmas to right-size their budgets and bank balances. But the winter weather across the country this February has been brutally cold, snowy and icy for the fourth time in the last five years. That may very well negatively impact consumer spending this month, so we may see a spending freeze in February. But that could thaw if the next round of stimulus checks come in Spring, with Passover on March 27 and Easter on April 4.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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