Retailers and their suppliers are just now launching their annual holiday parties. There aren’t as many goodies as in the past (don’t want to waste them this year). And there’s less of the best stuff. Still, this year’s party is as important as any in the last 10 years. So the question is, are consumers in a partying mood?
Research conducted by Kurt Salmon Associates suggests that spending will be up between 1.4% and 1.7% in the fourth quarter versus 2008, for a variety of economic and consumer-driven reasons. So while this won’t be a raucous year, it will certainty provide more cheer than last year’s debacle.
The common wisdom is that back-to-school spending is a harbinger for holiday spending. Indeed, year-on-year growth in September personal consumption expenditures (PCE) has historically been a good indicator of fourth-quarter growth, explaining more than two-thirds of the variation in fourth-quarter sales over the last four decades.
In 2008, PCE dropped 0.2% in September, followed by a 1.8% drop in the fourth quarter. This translated into 70% of retailers suffering same-store declines averaging 3.7%. (See Exhibit 1.) So back-to-school spending does not always tell the whole story.
Our research indicates two other factors, in addition to back-to-school, that are worth watching. One is consumer confidence. Specifically, how has consumer confidence changed since last year’s back-to-school season? Not surprisingly, higher year-over-year consumer confidence in the economy and job security leads to more spending.
Another factor is wealth. The economic and psychological effects on consumers of appreciating or depreciating assets certainly impact spending. We determined that change in the S&P 500 is an effective barometer of wealth, and incorporated this data into our analysis.
Our data indicates that 80% of the variation in fourth quarter PCE growth can be explained by variation in these three factors: year-on-year changes in September real PCE, year-on-year changes in consumer confidence, and monthly changes in the S&P 500. Recently released data indicates that all three factors are positive going into the fourth quarter, which leads to our projected fourth quarter PCE growth of 1.4% to 1.7%.
This year’s analysis was complicated by government stimulus spending. September real PCE growth was just 0.2% versus 2008. To some degree, this reflects cash-for-clunkers, which drove up PCE in August and reduced it slightly in September. Our projection takes this distortion into account.
Of course, any number of shocks could knock these projections down. However, assuming the economy has entered a gradual recovery, the holiday season may even surpass our projections. Historically, when the fourth quarter of a year has fallen at the end of a recession or the beginning of a recovery, fourth quarter PCE growth has averaged 3.5%. (See Exhibit 2.)
In other positive news, consumers should have the cash to make holiday purchases. While consumer credit has tightened in recent quarters, the savings rate has rebounded from historical lows (as low as 1% in the spring of 2008). Consumers, concerned about jobs and the potential future loss of credit, have not aggressively paid down debt. Thus they retain liquid assets which can be used for consumption once the inclination to do so returns. (See Exhibit 3.)
As seen in the fourth quarter of 2008, same-store sales growth is more volatile than PCE growth. Same-store sales growth faces long-term head winds from factors ranging from increasing spending on healthcare to the continuing growth of internet sales. Still, we expect fourth-quarter same-store sales growth to exceed our PCE growth forecast in large part due to the weak 2008 comps.
As always, some retailers and brands will do much better and some will do much worse than the average. However, we do expect the band to be narrower in 2009 than in 2008. Some of the weakest players have been forced from the market. Most players still in the game are playing it very conservatively, carrying substantially less inventory, taking fewer product or fashion risks, and planning for less discounting. While possibly making holiday shopping less exciting for the consumer, these factors should mitigate the downside. This conservative approach also creates a growth ceiling since retailers can’t sell merchandise they don’t have and they’re not likely to have the hot, must-have product if they’ve played it safe.
Although KSA doesn’t foresee the fourth quarter to be a season of miracles for consumer industries, we do expect cause for quiet celebration.
For more information, contact us at peservices@kurtsalmon.com.
