When predicting holiday retail sales, all bets are off

Depending on which economist you listen to, or which economic indicator you rely on, or which politician you choose to believe, the retail economy is either flat, recovering slightly, or, well, heading for more gloom.
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Depending on which economist you listen to, or which economic indicator you rely on, or which politician you choose to believe, the retail economy is either flat, recovering slightly, or, well, heading for more gloom.

Certainly, recent Federal Deposit Insurance Corporation (FDIC) numbers are not encouraging. While housing sales are up, thanks to low interest rates, the FDIC has reported that many Americans are, in fact, buying homes to as a means to eliminate high-interest credit card debts to transferring those debts to lower-interest equity loans or lines of credit.

Consider that in the first quarter of 2003, home equity loan growth outpaced credit card growth by 5.6 percent. By the first quarter of 2004, that percentage had grown to 8.4 percent and is continuing on an upward trend. For the second quarter of 2004, U.S. home equity debt rocketed to a record-high of $415 billion, a 10 percent jump over Q1. If the climb continues, the home equity debt will exceed $500 billion by the end of the year.

In fact, a recent American Demographics article quoted Richard Hastings, a retail sector analyst for New York-based Bernard Sands, a retail market advisory firm, as warning that home equity debt growth is creating a more cash-strapped nation. As a result, Hasting said, retail spending on non-durables and durable goods will grow by 1.0 to 1.5 percentage points less than in 2003 -- not a sign of a recovering economy.

September sales reports wrapping up the third quarter gave pessimists something to point at ("See, the economy isn't good"), while at the same time offering sufficient hope for optimists to say, "What are you talking about, retail sales are up so quit worrying already."

Naturally, there is some kernel of truth to be found in both sides of the argument. Core retail sales, excluding the automobile market, have been wallowing in a .2 to .3 percent trend upwards -- up yes, but hardly anything to celebrate. Chain store sales were up only 2.4 percent year-over-year. However, consumer spending did rise 3.5 percent, well up from the 1.6 percent in the 2Q of 2004. All-in-all, economists and market experts are expecting September final sales numbers to come in up somewhere around .7 percent, a relieving turnaround from the decline of .3 percent in August. Certainly, all eyes will be on the Department of Commerce this Friday when it releases 3Q retail sales report.

Looking forward
While reports out of Wall Street and the National Retail Federation (NRF) indicate that expectation are for a strong holiday sales season, it likely won't mirror last year's holiday sales increase which jumped 5.1 percent, the largest retail sector sales increase since 1999.

A September survey of consumer buying intentions by the NPD Group indicates that 90 percent of Americans are planning to spend only the same amount as last year, or perhaps less. The study does indicate the 55 to 64 age group will likely spend the most. However, the biggest increases are likely to come from the young adults aged 18 to 24, bumping up dollars spent from $366 last year to $537 this year. The most frugal, according to the report, will be the 25 to 34 age group, which plans to slash spending by 21 percent over last year.

NRF is predicting a 4.5 percent increase over last year's holiday shopping season, as defined by sales in November and December for clothing, home furnishings, electronics, sporting goods, books, music and general merchandise stores.

Economists caution though that while the outlook may be somewhat rosy, it is a tough prediction to make since interest rates are rising, the geopolitical climate is anything but stable, income growth is slow, and energy costs are soaring.

Carl Steidtmann, chief economist for Deloitte Research, speaking at the Outdoor Industry Association Rendezvous in late September said that admittedly sporting goods retail has been in a bit of a recession since 2002, but is now coming out of it. He forecast the holiday outlook as good, suggesting even double-digit growth. But then he said he foresees a bit of a slow down, but that then only means back to single-digit growth.

Online outlook remains robust
A bright spot for retail might be found in the online realm -- that is, if your store sells products online. The 2004 Shop.org/BizRate.com Online Holiday Mood Study revealed that 98 percent of online stores believe sales will be up and healthy for the holiday season. That finding mirrors the response from consumers surveyed for the report. Thirty-two percent of those surveyed said they will do more of their holiday shopping online this year.

In addition, the study found that 89 percent plan on using the Internet to comparison shop and 86 percent expect to use the Internet to research gifts for others. The numbers dip a bit when determining who is going to actually spend money online, with 74 percent saying they will use the Internet to buy gifts for others, while 53 percent stated they will use the Internet to buy gifts for themselves. That last percentage indicates that 33 percent will use the Internet to comparison shop, but then head to a brick-and-mortar store to make the actual purchase -- if a purchase is actually made.

All eyes will be on the Internet beginning this week to get a sense for how healthy the holiday season will be, as the study revealed that 53 percent of consumers plan to begin their holiday shopping online in early to mid-October -- much earlier than brick-and-mortar shoppers begin cruising store aisles for holiday gifts.

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