Holiday retail sales

Holiday retail sales in 2017 are expected to rise 4.2% above last year, which would be the strongest growth rate since 2014. Sales during the holiday season are the preeminent revenue generator for most retailers, but holiday sales in recent years have seen varying levels of strength. This year, consumer spending continues to be supported by elevated levels of confidence and solid gains in employment, real disposable income, and household net worth. The strong gains in the equity markets will also assist in boosting luxury and discretionary spending this holiday season.

Retail goods price discounting

On a quarterly year-over-year basis, consumer prices for commodities other than food and energy have been in negative territory since the first half of 2013 due to the following macroeconomic, consumer, and supply chain trends:

1. The stronger dollar over the past couple of years has assisted in lowering imported consumer goods prices.
2. Many multinational corporations have learned that they can shift production or sourcing away from the Eastern provinces of China, where labor costs have been rising, to lower-cost areas such as Vietnam or China's interior or even Western provinces.
3. Lower energy prices imply lower transportation costs for US importers and logistics companies. In addition, domestically sourced goods and materials have become less expensive to transport.
4. The cost of many types of consumer goods popularly bought over Black Friday, like televisions and electronics, continue to decline even faster than other goods as their production becomes more efficient; television prices have spent most of the last decade falling by more than 10% a year.
5. Many traditional brick-and-mortar stores are fighting for market share, and so are offering amped-up price promotions - which many American households, in turn, have come to expect.
6. The rise of e-commerce retail sales has increased the exposure of in-store sales to price competition from online stores.
7. The spread of smartphone-based "shopping apps" which can send live updates on bargains and promotions as well as scour the internet for deals, has equipped some shoppers to find the lowest prices in real time - amplifying the winner-take-all retail environment, especially over the holiday season.

Black Friday shopping intensity

Black Friday over the past several years has lost some of its intensity. There are a few reasons:

• Over the past several years, retailers have begun their holiday price promotions progressively sooner, not waiting for the traditional Black Friday day to begin offering price discounts. Many households have learned over time that they can delay some of their back-to-school purchases and wait for the stronger price discounting that has been creeping into the first week after Halloween.
• Many retailers will be opening their doors on Thanksgiving Day-also known as Gray Thursday-to get a head start on Black Friday mania. Gray Thursday has been cannibalizing Black Friday's sales.
• Many shoppers have learned to stay away from the crowds and are turning first to the web. The absence of a sales tax (for online retailers without a physical presence in a given state) gives these retailers a built-in price advantage. Cyber stores have been offering price promotions sooner and sooner as well. In addition, Cyber Monday (the first Monday after Black Friday) has also been cannibalizing traditional Black Friday sales.
• Online holiday retail sales growth this year is likely to outpace last year's growth, and online-based merchants will continue to outperform their brick-and-mortar counterparts. Over the past several years, online retail sales have accelerated and are making a sizable dent in brick-and-mortar sales. Online holiday retail sales growth this year will likely upgrade to 13.0% from 12.8% in 2016. As a share of holiday spending, online holiday retail sales will reach a new high: last year, online sales represented 16.8% of holiday retail sales, and this year that share is likely to be 18.3%.
• It was a long, hard slog, but in 2016, real (inflation-adjusted) median income for US households finally surpassed its 2007 level, according to the Income and Poverty report for 2016 released in mid-September. Although things have started to improve, it took nine years for real median household income to dig out of the ditch triggered by the Great Recession, during which time many middle-class families were forced into a lower standard of living. Because there are still many households living paycheck-to-paycheck, "payroll-cycle economics"-the effect of consumers doing their shopping in the day or two after they are paid-is still very relevant.
• According to IHS Markit's US Payroll Tracker, there will be 820 thousand more paychecks hitting consumers' wallets on Black Friday this year compared with last year's Black Friday, and there will be 3.66 million more paychecks issued this year on the Monday-through-Wednesday runup to Thanksgiving Day compared with last year. All of this will boost spending in the Monday through Grey Thursday period.
• According to IHS Markit's US Payroll Tracker, there will be 2.6 million fewer paychecks hitting consumers' wallets on Black Friday this year than in 2015, 19.1 million fewer than in 2014, and 31.0 million fewer than the 2013 showing.

After Black Friday

Thanksgiving has been creeping earlier every year since 2013. The earliest Thanksgiving can possibly fall is November 22. This year, Thanksgiving falls on November 23 - which means that in 2017 there are 5 more shopping days between Thanksgiving and Christmas than there were in 2013 (when Thanksgiving was on November 28).

IHS Markit's Payroll tracker is forecasting that December 1st this year, which falls on the Friday after Black Friday, will be a mega payday - with 13.2 million more paychecks arriving than last year, 35.6 million more than in 2015, 34.5 million more than in 2014, and 38.5 million more than in 2013. In addition, Christmas Day falls on a Monday this year instead of last year's Sunday. This will give December holiday spending this year a sizeable boost.

As online shopping gains share, shipping and delivery times by online retailers and parcel delivery services have dropped. Shoppers have learned that they can afford to wait until the last minute to finish their shopping online and can still rely on getting their goods by the time they need them - further boosting December holiday spending.

Chris G. Christopher, Jr. is the Executive Director of US Macro, Global Economics, and Consumer Markets for IHS Markit.
David Deull is a Senior Economist in the US Macro and US Consumer Economics services of IHS Markit.
Laura Hand is an Associate Director in the Economics & Country Risk consulting practice at IHS Markit with a focus on the consumer, retail, and manufacturing sectors.

Posted 20 November 2017