Holiday Spending Should Be Strong. And Then?

Posted November 22, 2018 12:25 p.m. EST

Americans are upbeat about the economy heading into the holiday shopping season. But that good cheer may not last long.

With the lowest unemployment rate in nearly half a century, and wage growth starting to pick up, economists expect shoppers to open their wallets. A survey by the National Retail Federation, a trade group, points to 4.1 percent more holiday spending than last year, and some forecasters expect even stronger growth. Measures of consumer confidence are near post-recession highs.

“You see momentum going into the season, cutting across a large range of categories,” said Stephen Sadove, a former Saks Fifth Avenue chief who is now a senior adviser for Mastercard. “It’s probably the healthiest growth we’ve seen in the past half-dozen years.”

But those projections predate the latest round of stock market declines, which this week pushed the S&P 500 index into negative territory for the year.

It’s too soon to say whether the drop will rattle consumers. But even before the sell-off, many economists were warning that a combination of factors — including rising interest rates, a weakening housing market and a new round of tariffs set to take effect in January — could begin to slow down the economy in 2019.

Consumers are feeling good.

Last year’s holiday season was the best for retailers in more than a decade. Americans are feeling even better this year.

Thirty-seven percent of Americans say their finances are in better shape than they were a year ago, while 17 percent say they are worse off, according to a survey conducted for The New York Times in early November by the online research platform SurveyMonkey. Last November, just 28 percent said they were better off.

Consumers say they are feeling even more positive about the future. Forty-one percent expect to be better off financially a year from now — versus just 14 percent who expect to be worse off — and a majority of survey respondents said “continuous good times economically” were in store over the next five years.

Other surveys show similar optimism. The University of Michigan on Wednesday reported that consumer sentiment had ticked down slightly in November but that the index remained high by historical standards.

That confidence is leading consumers to loosen their purse strings, said Diane Swonk, an economist for accounting firm Grant Thornton. She noted that spending was up in discretionary categories like restaurant meals, travel and clothing.

“Consumers are dressing up and stepping out a bit,” Swonk said. “They’ve got money for discretionary spending, they’re traveling a lot.”

Low gasoline prices may provide a dividend.

Consumers have plenty of reasons for feeling good. Economic growth is on track for its best annual performance since 2005. And crucially, the tight labor market at last appears to be translating into faster wage growth for workers. Average hourly earnings were up 3.1 percent in October from a year earlier, their fastest growth since before the recession.

Households are also getting help from gasoline prices, which have fallen sharply in the past month after rising earlier in the year.

“If gas prices go down, it basically acts like a tax cut,” said Joseph Song, an economist for Bank of America Merrill Lynch.

Then there is the actual tax cut. The $1.5 trillion tax law that Republicans passed last year helped pump up consumer spending earlier this year, and economists said the effect is lingering into this holiday season. Overall, households’ finances are in their strongest shape in years, with low levels of debt and rising after-tax income.

But warning signals are flashing.

U.S. gross domestic product has posted two straight quarters of strong growth, driven largely by robust consumer spending. Most economists expect that growth to slow in the final three months of the year as the effects of the tax cuts fade.

“There’s a very clear spike in sales in the middle of the year obviously driven by the tax cuts, and there’s an equally clear reversal in the second half of the year,” said Ian Shepherdson, an economist for Pantheon Macroeconomics, a research firm. “It’s the sugar rush followed by the comedown.”

That slowdown, by itself, isn’t much cause for concern, Shepherdson said. But there are other hints of trouble on the horizon. The housing market has slowed markedly this year, as interest rates have risen and prices have outstripped income growth. And additional tariffs on Chinese goods are set to take effect in January, which could push up consumer prices.

“Consumers are at the heart of what’s gone right in the economy the past couple years, and I think they’re going to be the biggest contributor to the slowdown,” said James Bohnaker, an economist for IHS, a research firm.

Those concerns may be part of what has driven the stock market’s recent drop. Retail stocks fell Tuesday despite strong results, as investors worried that rising costs could eat into earnings.

The market turmoil could affect consumer sentiment, especially among wealthier households more likely to own stocks. The University of Michigan survey found that confidence fell more among higher-earning households in November.

But falling share prices are unlikely to hurt holiday sales much, Song said. Most Americans don’t own stocks outside of their retirement accounts, and many have already set their holiday budgets — or have even begun to shop. A Bank of America survey found that about 20 percent of consumers started their holiday shopping before November, and 67 percent said they planned to shop over the extended Thanksgiving weekend.

“I have a tough time really seeing this hurting consumer spending,” Song said of the market declines. “A lot of the shopping is already baked in.”

For some, the election was a damper.

Ever since President Donald Trump took office, consumer confidence has shown a sharp partisan split, with Republicans feeling far better about the economy than Democrats. This month’s midterm elections, in which Democrats retook control of the House of Representatives, may have begun to narrow that gap.

SurveyMonkey took its survey the week of the election, conducting about 4,300 online interviews on or before Election Day and 5,000 after the results were known. Among Democrats and independents, the results changed little over the course of the survey.

But for Republicans, there was a clear shift in outlook: Among Republicans interviewed before the election, 66 percent said they expected their finances to improve over the next year. Among those interviewed afterward, that share fell to 59 percent. The effect was particularly pronounced among strong supporters of Trump, who showed a 9-point decline after the election in the share expecting their finances to be better a year from now.

About the survey: The data in this article came from an online survey of 9,380 adults conducted by the polling firm SurveyMonkey from Nov. 5 to Nov. 11. The company selected respondents at random from the nearly 3 million people who take surveys on its platform each day. Responses were weighted to match the demographic profile of the population of the United States. The survey has a modeled error estimate (similar to a margin of error in a standard telephone poll) of plus or minus 1.5 percentage points, so differences of less than that amount are statistically insignificant.