Late Thanksgiving skews early holiday sales
Bottom line The combination of a powerful wealth effect, a strong labor market, a rebound in consumer and business confidence, an elevated savings rate and lower gas prices has contributed to a solid start to the holiday shopping season. But shopping for this critically important retail season began earnestly in October, and the latest possible date for Thanksgiving pushed some sales from November into December, effectively spreading the nascent strength of the unfolding Christmas and Hanukkah season over the past three months.
This morning, the Commerce Department reported disappointing nominal retail sales in November. They rose a weaker-than-expected 0.2% on a month-over-month (m/m) basis (0.5% gain expected) with a modest one-tick upward revision in October to a 0.4% m/m gain. September was revised down a tick to a m/m decline of 0.4%, as consumers were amassing dry powder for the upcoming holiday season.
“Control” results (which strip out autos, gasoline, building materials and food-service, and feed directly into the quarterly GDP report) were equally disappointing, rising by a modest 0.1% m/m in November (0.3% gain expected), with October unrevised at a m/m gain of 0.3%. September control results were revised sharply lower to a final m/m decline of 0.4%.
Late Thanksgiving was a calendar drag Thanksgiving fell on the latest possible day of the year in 2019 (Nov. 28), so there are six fewer shopping days until Christmas compared with last year. To compensate, many retailers began to aggressively roll out their Thanksgiving weekend promotions in the beginning of October, pulling sales forward at the expense of November.
Moreover, the Sunday after Thanksgiving, Cyber Monday and Giving Tuesday all fell into December, so the strong Thanksgiving-weekend sales were split between the two months. According to the National Retail Federation (NRF), nearly 190 million shoppers made purchases over Thanksgiving weekend (a 14% increase from last year), and the dollar volume of their spending increased 16%.
E-commerce sales breaking records Black Friday’s online sales leapt 19% year-over-year (y/y) to $7.4 billion and Cyber Monday’s similarly leapt by 19% to $9.4 billion, according to Adobe Analytics. Online sales are expected to account for about 23% of all holiday spending this year, according to the NRF.
Strong labor market driving robust holiday spending:
- Unemployment rate (U-3) declined to 3.5% in November, a 50-year low.
- Wage growth in November was at 3.1%, just below a 10-year high of 3.4%
- Initial weekly unemployment claims for the week ended Nov. 30 fell to 203,000, a 7-month low and just off a 49-year low of 193,000 in April 2019. Claims are a leading economic and employment indicator.
Rebound in business and consumer confidence:
- Michigan Consumer Sentiment Index rose to a 13-year high of 101.4 in March 2018, but it declined sharply to 92 in September 2019. It has since bounced to a 7-month high of 99.2 in December.
- NFIB Small Business Optimism Index peaked at 108.8 in August 2018, before falling to 101.8 in September 2019. But it has since rebounded to a 6-month high of 104.7 in November.
Elevated savings rate September’s m/m decline in retail spending boosted the personal savings rate to a 6-month high of 8.1% at month-end, providing consumers with plenty of dry powder to spend during the holidays. The savings rate declined to 7.8% in October.
Lower gas prices Gas prices have fallen nearly 12%, from a peak of $2.90 per gallon in early May 2019 to $2.56 today. The rule of thumb is that every 1 cent decline at the pumps adds $1.2 billion in consumer discretionary spending, which could translate into 15-20 basis points of stronger GDP growth annually and more kindling to fuel stronger holiday spending.
Back-to-School (BTS) sales This category is a good touchstone for holiday spending Christmas historically tends to be 80-90% positively correlated with BTS results, excluding any weather-related issues. In 2019, BTS spending rose a solid 4% in July, August and September on a y/y basis. That compares with a 5.5% gain in 2018, which was the strongest BTS season since 2011’s robust gain of 7.8%.
For Christmas 2019, NRF is forecasting a 3.8-4.2% y/y gain for November and December, Telsey Advisory Group (TAG) is forecasting 4.5%, and we’ve been estimating that total holiday retail sales growth will approximate 4-4.5%. So far, fourth-quarter retail sales for October and November combined have risen 3.3% y/y, compared with 4.4% in 2018.
Importantly, 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% of gift cards are typically redeemed the week after Christmas, and 60-65% are usually redeemed during the first half of January. So January gift-card redemptions will help determine the overall strength or weakness of the holiday season.
Powerful wealth effect should spark strong Christmas spending Since last Christmas Eve’s oversold trough at 2,347, the S&P 500 has surged 35% to a new record high at 3,182 today, as recession fears have faded, the Federal Reserve has announced its monetary policy plans are on hold through next year and progress is being made on resolving the long-simmering concerns over China trade and Brexit. The top socioeconomic half of America owns stocks in their retirement and college-savings plans, so that burgeoning wealth effect should help to spark a jolly Christmas.
In addition, our research friends at Evercore ISI note that over the past 20 years there has been an 86% correlation between the S&P's fourth-quarter performance and holiday sales. So with the S&P up about 7% so far in the fourth quarter, retail sales should be strongly positive against an easy December comparison, down 2.2% m/m and up only 1.4% y/y.
Very strong Christmas tree sales Since 2002, 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 sales of 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 two weeks now complete in a short four-week season, ISI’s annual Christmas tree unit sales survey has posted a much stronger-than-expected average y/y sales gain of 20% in 2019, versus a 6% full-season gain in 2018, 7% in 2017 and 10% in 2016, which were the strongest results in the history of their survey. The average annual sales gain over the 17-year life of the survey approximates 6%. So we are orchestrating a record-breaking pace thus far in 2019.
True, with a 4-week season this year versus a five-week gap between Thanksgiving and Christmas last year, customers are buying their trees early, particularly the larger, more expensive trees. There is still a shortage of mature Christmas trees available to be harvested (due to planting issues a decade ago during the Great Recession), so prices are higher. This trend may be driving some buyers to purchase artificial trees instead, which ISI’s survey does not capture.
But record-breaking Christmas tree sales so far this season—in addition to other favorable aforementioned metrics—is incrementally providing us with greater confidence that holiday spending will be solid this year.