Positive consumer momentum prior to hurricanes should carry forward into the holiday season.
t’s that time of year again, when consumers gear up for the holiday season. This year, NRF expects U.S. holiday retail sales to increase between 3.6 and 4 percent, meeting or exceeding last year’s growth of 3.6 percent and the five-year average of 3.5 percent. We are optimistic that retailers will see a healthy holiday season, and several indicators support that outlook.
Unemployment is down. The nation’s unemployment rate fell to 4.2 percent in September, the lowest in 16 years, and average hourly earnings were up 2.9 percent over the same month a year ago, a record high for this expansion. Second-quarter household wealth was boosted by rising home and stock prices while household debt saw relatively modest growth. Those improvements match up well with business and consumer attitudes.
The economy is bouncing back from the impact of hurricanes. While U.S. economic data released in mid-October was heavily influenced by the hurricanes that hit Florida, Texas and Puerto Rico, an economic rebound is expected in the coming months, concurrent with the all-important holiday season. This view is consistent with the Federal Reserve’s assessment as reported in the September Open Market meeting minutes. According to the report, the hurricanes will likely distort the incoming data on growth and inflation. Short-term disruptions to spending and production are expected to reduce economic activity in the third quarter and boost it in the fourth quarter, though the course of the economy should return to its pre-hurricane path as a portion of lost spending is made up. It will be very important to see how the data performs in the coming months but the situation is better than it looks.
Consumers are upbeat. A key reason to remain upbeat is the optimism evident in business and consumer sentiment surveys. Both the Institute for Supply Management manufacturing index and the ISM non-manufacturing index rose sharply in September — encouraging evidence of a solid upward growth trajectory after bottoming in mid-2016. The same strong tones were evident in the University of Michigan Consumer Sentiment Index, which jumped six points in early October to a new cycle high of 101.1. The surge appears to be driven by increased optimism about employment and income prospects, however the optimism is not necessarily shared by all businesses. The National Federation of Independent Businesses small business report for September showed some moderation in optimism, with the headline index declining 2.3 percentage points, the largest one-month drop since June 2015. Despite some easing in the latest survey, small business owners remain mostly upbeat, with the index averaging 104.8 over the past 10 months compared with 94.1 one year ago.
Overall, the consumer is in solid shape. The combination of sturdy employment and income growth along with an increase in net worth all point to consumers having both the capacity and the confidence to spend during the holiday season.