Holiday Sales Forecasts: Good But Not Great

Holiday spending is projected to grow, but not as much as last year. Matthew Zeitlin looks at the numbers.

The holiday season for retailers will be a lot like the holiday season for us gift-givers: good but not great.

Starting in October, as retailers ramp up their holiday hiring and plan for ever-earlier Black Friday (and Black Thursday) openings, trade groups and analysts put out forecasts for holiday sales. The most widely watched and cited is the one put out by the National Retail Federation. The trade group that represents shopping centers has its own forecast. The professional services firm Deloitte has a widely distributed survey, as does the management consulting firm Bain & Company.

The National Retail Federation projects an increase in holiday sales of 4.1 percent, which would be a drop from 2011’s 5.6 percent growth. It is, however, the highest forecast NRF has issued since the recession and comfortably beats the 10-year average growth of 3.5 percent.

Retail sales, both as an indicator over time and as a snapshot during holidays, provide a unique window into the strength and sentiment of the American consumer. Consumer activity accounts for about 70 percent of American activity. And consumer activity is disproportionately concentrated into the five weeks between Thanksgiving and New Year’s. The holiday shopping season can make or break retailers’ years.

The forecasts, which are based on a combination of survey data measuring consumers shopping plans, past retail sales, and economic indicators, provide a glimpse into what’s motivating the American consumer. The National Retail Federation’s forecast paints a picture of shoppers encouraged by broadly positive economic conditions but unsettled by politics.

One broad economic trend that’s driving the NRF’s optimistic forecast is housing. Kathy Grannis, the director of media relations for the NRF, said in an interview with The Daily Beast “If you’re under water, you’re not buying discretionary products like electronics and apparel.” And since home values are climbing steadily, that translates pretty easily into higher sales.

This works through two related channels: the first is the “wealth effect”—the empirical positive relationship between the value of an individual’s assets, which in the case of most Americans is their home, and their consumption spending. The second is what Carl Steidtmann, chief economist at Deloitte, calls “the wealth effect becoming real”: refinancing that allows homeowners to reduce their mortgage payments, which translates directly into higher cash flow for consumers. With refinancing activity booming, the optimistic sales forecasts make more sense.

The NRF, however, cautions that the combination of uncertainty generated by the unresolved tax and spending situation come Jan. 1 and, more specifically, the possibility of a large tax hike, may be weighing down planned holiday spending. Grannis said, “It’s a fact that Americans do pay very close attention to what’s happening in Washington,” pointing specifically to how consumer confidence cratered right around the debt ceiling standoff last year. Given the sizable middle-class tax increase hanging over the head of the American worker, Grannis says that the NRF’s 4.1 percent forecast is “in light of what’s going on in the economy and politics … pretty optimistic.”

Deloitte’s holiday sales forecast, which came out in late September, projected a holiday sales increase of 3.5 to 4 percent, below what it reported as 5.9 percent growth last year. Steidtmann, of Deloitte, said that the forecast came from a combination of survey data and a look at economic data that affects cashflow for individual households.

He said that there were two main crosscurrents working against each other. On the positive side was housing—as prices rise, confidence goes up, the wealth effect kicks in, and homeowners can refinance and lower their mortgage payments. The upward pressure on home prices, Steidtmann said, is “a change from a year ago and a significant change from the last four years.”

However, real wages, which aren’t even keeping up with inflation, are helping to weigh down spending. According to the Bureau of Labor Statistics, real hourly earnings have fallen 1.8 percent since peaking two years ago.

Steidtmann was not as worried about the fiscal cliff getting in the way of holiday spending. After all, he said, when Deloitte did the survey in September, the consensus was that the payroll tax holiday wouldn’t be extended. “It hasn’t had much effect on spending to date,” he said. “People generally spend on the margin of what they’ve got.” In other words, the payroll tax returning to its pre-2009 levels come Jan. 1 will more likely affect spending in the first few months of 2013—not in the last few months of 2012. And for retailers, that might be something to celebrate, no matter what happens Jan. 1.