Will strong back-to-school sales continue into Christmas? Will strong back-to-school sales continue into Christmas? http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\school-bus-small.jpg September 24 2021 September 24 2021

Will strong back-to-school sales continue into Christmas?

Typically yes, but headwinds might diminish them.

Published September 24 2021
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Back-to-School (BTS) spending from June through August 2021 has risen by a powerful 16.2% on a year-over-year (y/y) basis and by 19.2% versus BTS in 2019. That compares with more typical y/y increases in those three months ranging from 2.7% to 5.8% over the previous four years.

We usually calculate BTS spending from mid-July through mid-September. But because of the well-publicized supply-chain outages, it began in June as students and parents were wary of the potential for out-of-stock on electronics, apparel and dorm-room furnishings. In addition, Amazon moved its annual Prime Day from July into June, resulting in a surge in online commerce at July’s expense.

Ordinarily, all of this would augur well for Christmas, whose retail sales usually are 80-90% positively correlated with BTS results (excluding the impact of extreme weather problems). But storm clouds are forming on the horizon, led by the uncertainty caused by the Covid-19 delta variant. Moreover, a record 73 container ships are stuck in the water outside the jammed ports of Los Angeles and Long Beach, exacerbating supply-chain woes and preventing retailers from fully stocking their shelves for important holiday shopping.

From an economic standpoint, inflation has surged, business and consumer confidence have declined, the savings rate is normalizing and the labor market’s recovery has been choppy. Finally, impending fiscal and monetary policy changes in Washington, with the potential for higher tax rates and tapering of Federal Reserve asset purchases, could have a chilling effect on holiday spending.

Delta wild card There’s little question that the delta variant has sparked a fourth wave of infections, hospitalizations and mortalities this summer, as vaccination rates plunged 85% from their April peak at 3.5 million daily jabs. But delta appears to have peaked, though it is still rising in those other states where vaccine-hesitant residents are below national vaccination levels. It may also be premature to place delta in the rear-view mirror due to four recent super-spreader developments: in-person schools; capacity crowds at college and pro football games; Labor Day weekend festivities; and the Jewish High Holy Days. We’ll have a much better feel for this next month, and we’re watching closely to see if other Covid variants, such as lambda or mu, gather steam and prove resistant to our existing vaccines.

Port backlog: the Grinch who stole Christmas? An unprecedented 73 container ships are stacked up outside of the Los Angeles and Long Beach ports, according to the Marine Exchange of Southern California, a backlog that has doubled over just the past month. This logjam worsens the growing supply-chain bottleneck, preventing retailers from fully stocking their shelves ahead of the critically important holiday shopping season. If a consumer finds their Christmas item next week at full price, they should buy it, because there’s no guarantee the item will still be in stock closer to Christmas, with little chance it will be priced on discount.

Inflation remains elevated The core wholesale Producer Price Index (PPI) hit a new record high of 6.3% y/y in August. The core Personal Consumption Expenditure Index (PCE, the Fed’s preferred measure of inflation) hit a 30-year high at 3.6% y/y in both June and July, which is well above the Fed’s 2% target. The core retail Consumer Price Index (CPI) rose to a 30-year high of 4.5% y/y in June, although it did ease to 4.3% in July and 4% in August. While that suggests that the core PCE could slip to 3.5% in August, we remain concerned about stubbornly high costs for food, energy, housing and labor. Businesses haven’t been shy about passing on rising inflation to their end customers in the form of higher prices, which could, at the margin, begin to impact demand.

Personal savings rate normalizing There’s no doubt that Christmas and “Mapril” spending benefited from the extraordinary fiscal-policy stimulus from the CARES Act and the American Rescue Plan, respectively. Additionally, the personal saving rate spiked from a 1-year high of 8.4% in February 2020 before the pandemic to a record 33.7% in April 2020, due to these direct payments and generous unemployment benefits. More recently, the personal savings rate has slowed from 26.6% in March 2021 to 9.6% in July 2021, rapidly approaching its average of 6.7% over the last 25 years. As a result, the willingness and ability of consumers to afford ever-rising prices may soon be waning.

Labor market recovery slowing Although initial weekly unemployment claims plunged 95% over the past 18 months from their peak at 6.15 million in April 2020, they have backed up by 12% over the past fortnight, from 312,000 to 351,000 for the September survey week that ended on Sept. 18. August 2021 nonfarm payrolls were very disappointing at a gain of only 235,000 (down sharply from a gain of 1.053 million in July), and September may not get back to July’s lofty levels. Wages have surged 6.24% on an annualized basis over the past five months, as employers are trying to entice potential workers to fill a record 11 million open jobs in the U.S.

Looking ahead to Christmas, major employers such as Amazon, FedEx, UPS, Target, Walmart and Macy’s are each planning to add tens of thousands of temporary and full-time workers. But with higher wages, companies have no visibility on when these labor-cost pressures will begin to normalize, and many are simply passing the costs onto customers in the form of rising prices.

Business and consumer confidence have slipped in recent months:

  • NAHB Housing Market Index of builder confidence leapt to a new 35-year record high of 90 in November 2020 due to lower mortgage rates and strong demand. But the index fell to a weaker-than-expected 75 in August 2021 due to the lack of inventory, higher commodity prices, labor shortages, sharply higher wages and higher home prices. It increased to 76 in September.
  • 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 two months, to 113.8 in August, due to sharply rising inflation and the delta variant.
  • Michigan Consumer Sentiment Index surged to a 1-year high of 88.3 in April 2021. But results plunged over the last four months to a much weaker-than-expected 10-year low of 70.3 in August 2021, due to inflation and delta concerns. Preliminary September results rose to 71.
  • National Federation of Independent Business Small-Business Optimism Index rebounded to an 8-month high of 102.5 in June 2021. But July surprisingly fell to a weaker-than-expected 99.7, as half of small businesses have open positions. They’ve raised wages to attract new employees and they’ve passed those higher labor costs onto their end clients, boosting inflation. September inched up to 100.1.

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DISCLOSURES

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.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The National Association of Home Builders/Wells Fargo Housing Market Index is a gauge of how well or poorly builders believe their business will do in coming months.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

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