How the 'Congrinch' Stole Christmas
Congress' delay in reaching a new fiscal stimulus deal has hurt consumer spending.
Bottom line Despite strong Back-to-School (BTS) sales, a powerful fourth-quarter stock market rally to record highs, record Christmas tree sales and e-commerce deliveries, November retail sales were surprisingly weaker than expected. October (the start of the Christmas shopping season) was revised lower.
The Commerce Department reported this week that nominal retail sales in November declined 1.1% on a month-over-month (m/m) basis (versus the expected -0.3%), with a downward revision in October to a m/m decline of 0.1% (originally reported as a 0.3% gain). September was revised up to a strong final m/m increase of 1.7%.
“Control” results (which strip out autos, gasoline, building materials and food service, and feed directly into the quarterly gross domestic product report) were equally disappointing, declining by a much weaker-than-expected 0.5% m/m in November (0.2% gain expected), with October revised down to a decline of 0.1% from an increase of 0.1%. September control results were revised up to a strong final m/m gain of 1.2%.
True, autos and gasoline, clothing, department stores, bars and restaurants were soft last month. But this weakness in retail sales over the past two months seems relatively inconsistent with the strength of these other aforementioned metrics, and it appears that the current surge in Covid-19 infections and ongoing Congressional intransigence in passing more fiscal stimulus are collectively having a negative impact on holiday spending. Is this a timing problem, or has something fundamentally changed?
We’re still expecting a good Christmas Deloitte’s high-end forecast of a 2.5-3.5% year-over-year (y/y) increase in Christmas retail sales compares with 2019’s 4.2% increase. It believes e-commerce sales should soar 25-35% y/y, compared with 14.7% in 2019. However, the National Retail Foundation (NRF) is forecasting a more optimistic 3.6-5.2% y/y increase in holiday sales in 2020, with a projected 20-30% increase in e-commerce. Our research friends at Telsey Advisory Group (TAG) are forecasting a 4-5% y/y increase in holiday sales. Although November’s sequential retail sales growth was disappointingly negative, October and November combined have risen a solid 4.8% on a y/y basis, compared with a 3.2% y/y gain for the same period in 2019. E-commerce sales are clearly leading the parade, up 30% and 25%, respectively, on a y/y basis in November and October.
Congress driving a K-shaped economic recovery The socio-economic top 20% of America disproportionately accounts for 40% of consumer spending, while the bottom 40% accounts for only 20% of spending. As the pandemic pushed the U.S. economy into the deepest recession on record, many were able to successfully work from home. Still, 22 million lost their jobs last spring, and their consumer spending was initially buoyed by the generous CARES Act in March and April.
But since May, Congress has been unable to pass its next iteration of fiscal support. House Democrats and Senate Republicans have been parrying for the last eight months, pushing three moral hazards to score political points ahead of the contentious presidential election. They have not agreed upon a Phase 4 fiscal stimulus package, and the American people are paying the price. This is reflected in the poor November retail sales report and a sharp 25% increase in initial weekly jobless claims over past five weeks, among other metrics.
Clearly frustrated with the inability of this do-nothing Congress to reach a deal, several centrist Senators and Representatives from both parties stepped forward recently and are actively working on a bipartisan $900 billion bill, which strips out two of these moral hazards (non-Covid local/state aid and liability protection for businesses).
Today is their self-imposed deadline, as members of Congress want to return home for Christmas this weekend. But Senate Majority leader Mitch McConnell and House Speaker Nancy Pelosi are now both highly motivated–even post election–to remain in Washington for as long as it takes to hammer this compromise spending plan into place. McConnell is hoping Republicans win the two Senate seats in the Georgia run-off election on January 5, so he can retain his role as Senate majority leader. Speaker Pelosi saw her Democratic House majority shrink from 35 seats to only nine, the slimmest majority in decades. She is hoping to hold onto the Speaker’s gavel when the new Congress sits in January.
Back-to-School sales pointing to good holiday spending Christmas historically tends to be 80-90% positively correlated with BTS results, excluding any weather-related issues. In 2020, BTS spending rose a solid 4.1% y/y in July, August and September combined, compared with a 3.9% gain in 2019.
We typically include January in our analysis of Christmas sales, because of post-holiday gift-card redemptions. Gift cards only count as a retail sale when they’re redeemed, not when they’re purchased. About 15% are typically redeemed the week after Christmas, and 60-65% are usually redeemed during the first half of January. January redemptions will help determine the overall strength or weakness of the holiday season.
Whither online sales? While e-commerce sales leapt 30% y/y in November, they rose a paltry 0.2% sequentially from October. That makes little sense to us, as FedEx, UPS and the U.S. Post Office are all reporting a record onslaught of package deliveries for Christmas. In fact, UPS has imposed daily shipping restrictions on six major retailers, because the surge in volume is stretching their network capabilities.
Strong wealth effect should drive solid Christmas Our research friends at Evercore ISI note that over the past 21 years, there has been an 81% correlation between the S&P 500’s fourth-quarter performance and holiday sales. With the S&P up about 11% so far in the fourth quarter on a total-return basis, retail sales should be strongly positive, well above the high end of the NRF’s forecast. While the top socio-economic half of America owns stocks in their retirement and college-savings plans–which would typically spark a jolly Christmas–the bottom-half is struggling in our K-shaped economic recovery in the absence of additional Congressional support.
Christmas tree sales off the charts Since 2002, Evercore ISI has been gathering data from 24 regional Christmas tree associations, farmers and retailers in the U.S. and Canada during each of the four or five weeks in between Thanksgiving and Christmas, to gauge the relative strength or weakness of the sale of Christmas trees, wreaths and garlands. If consumer confidence is high and the economy is strong, then people usually spend more money on their holiday decorations, in addition to their gifts, food and beverages, and travel.
With three weeks now complete in this year’s four-week season, their annual Christmas tree unit sales survey has posted a record 25% y/y sales gain versus a 16% gain in 2019, which was the previous record. The average annual sales gain over the 18-year life of the survey approximates 6-7%, so they are running at about four times the typical annual run rate, despite–or perhaps because of–the pandemic. Nearly 70% of companies have already shut down for the season, as they are completely out of inventory due to an unprecedented surge in demand.