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This holiday season feels a bit more "normal" than the last,
with COVID-19 related restrictions on mobility essentially
nonexistent and many Americans engaging freely in travel,
recreation, and holiday shopping. More than two-thirds of the US
population is fully vaccinated against COVID-19, most students have
resumed in-person learning, and the economy, as a whole, is
booming. Still, collective anxiety levels remain uncomfortably high
as still-elevated levels of COVID-19 cases and deaths have kept the
virus a central consideration for many households. Additionally,
consumers are no longer receiving stimulus money, and inflation is
at its highest in decades. How will these crosscurrents impact
spending over the 2021 winter holidays? Will pandemic-era shopping
trends continue to prevail, or will we see new wrinkles in the
retail sector this year?
First, let's assess where we are today. Through October, total
retail sales (excluding food services) were 14.8% above last
October and 23.1% above February 2020. For comparison, nominal
personal consumption expenditures for services in October were only
3.6% above the pre-pandemic level (February 2020). The
pandemic-induced shift toward relatively more consumer spending on
goods has not yet let up despite fewer business restrictions and
gradually improving volumes of travel, dining out, and
entertainment. While it is difficult to gauge the long-term impacts
of the pandemic, at present, it is clear that spending patterns
continue to be heavily influenced by health considerations and
related lifestyle choices such as more time at home for work,
school, and pleasure. Consumers have responded by spending more on
groceries, sporting goods, home improvement, and anything they can
purchase online. This holiday season is likely to bring more of the
same as shoppers remain uncertain about the path of the pandemic
and the extent to which new variants will impact our lives.
Overall, pandemic-induced shopping trends have been a net plus
for the overall holiday retail outlook. We forecast that holiday
retail sales this year will amount to $888 billion, or an increase
of 16.6% above last year's sales. This would easily be the
strongest growth rate on record dating back to 1992. Even more
impressive is that this comes on the heels of 8.3% growth last
year, which was only bested by a 1999 holiday surge of 8.7%.
To be sure, some of this year's strength in holiday sales,
relative to last year, reflects considerably larger increases in
prices for consumer commodities. However, the acceleration in
holiday sales was considerable, even after adjusting for price
change. Based on published CPI's and their relative importance
measures, we estimate that the CPI for commodities excluding motor
vehicles and gasoline rose roughly 5% over the twelve months ending
this November following roughly 1% growth over the twelve months
ending last November. Using these to deflate holiday sales, would
imply about 11.6% growth in real holiday sales this year following
about 7.3% real growth last year.
At first glance, our projection for the "best year ever" sounds
bold amid the aforementioned sources of uncertainty and levels of
consumer sentiment which are mired near the lowest levels
experienced during the pandemic. But it is important to consider
that the level of retail sales is already running extremely hot, so
it would take an outsize contraction in spending over November and
December to change the outlook materially. Even in a downside
scenario, where retail sales decline in November and December,
holiday sales are almost certain to clock in with record-breaking
growth.
That said, there are several reasons to expect that retail sales
will, in fact, slow from their recently elevated rates over the
holiday season. First and foremost, we believe that consumers began
their holiday shopping earlier than is typical this year. Media
coverage of supply chain bottlenecks has been ever-present since
late summer, preparing shoppers for potential product shortages and
delayed delivery times during the peak shopping season between
Black Friday and Christmas. There is some evidence that this pull
forward in shopping is playing out. Google Trends measures of
searches for "supply chain" in the US peaked in mid-October at
levels double the usual rate earlier in 2021, which coincided with
a strong reading on retail sales in October. Additionally, there
were reports from retailers and consumer mobility trackers that
suggested disappointing levels of retail foot traffic over the
Black Friday weekend, suggesting that shoppers got started earlier
this year.
There remains considerable uncertainty about how the current
supply-chain dynamics will impact shopping strategies. On the one
hand, the prospect of empty shelves in stores could frustrate some
shoppers and encourage more purchases from direct online platforms,
but longer delivery times and products being on back-order may
entice shoppers to further embrace the "buy online, pick up
in-store" option that has become increasingly popular in the last
couple years. The benefit of this model is that consumers can
ensure their desired product is in stock and able to be secured
that very same day, with the added feature of avoiding crowded
aisles and short-staffed checkout lines. This is not an option for
all shoppers or all stores, so it seems logical that this will
benefit retailers who have already embraced this practice during
the pandemic. Smaller businesses will likely have a more difficult
time fulfilling orders amid supply-chain bottlenecks and these
shifting consumer preferences. Nevertheless, pure online shopping
will remain the best-performing category of retail over the holiday
period. We forecast that online holiday sales will grow 17.7% over
last year, compared to the 25.1% rate in 2020 which was the
strongest ever. The expected growth this year would nudge the
online share of total holiday sales up from 23.2% in 2020 to 23.4%
this year.
Despite concerns about supply chains, inflation, and the
pandemic, fundamentals are generally strong, and households have
continually proved resilient in their spending over the last two
years. Consumer expectations about the labor market are decidedly
optimistic, household balance sheets are healthy, and Americans
have accumulated wealth via stimulus and asset holdings over the
past couple of years. Moreover, there is a general sense that each
"wave" of the COVID virus will have a lesser impact on the economy
and that the human toll will eventually lighten. These tailwinds
should ensure a cheerful 2021 holiday season for retail
spending.
Posted 14 December 2021 by Akshat Goel, Senior Economist, US Macro and Consumer Economics, S&P Global Market Intelligence
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