Markets & Finance

Holiday Sales: A Touch Merrier in '09


Spending should beat last year's figures, says Action Economics, but 2009 should still be one of the worst holiday seasons of the past several decades

This year's holiday season sales figures (monthly figures for November and December combined) will certainly beat the ugly batch of year-over-year data for 2008, which proved the worst holiday shopping season in Action Economics' data set going back to 1960. That's not much of a present, however. This year is poised for a three-way tie with 1990 and 1991 to prove the fifth-worst holiday season, behind the nasty recession years of 2008, 1980, 1981, and 1974, despite the benefit of an easy comparison with last year's horrendous sales levels. Retailers have already accelerated price cuts to lock up market share, but this effort will likely not help the totals for the season overall. Heavy discounting should be the dominant theme for sales through this season. Our forecasts for six major monthly sales measures for the November-December period reflect these factors. The retail sales figures should post a gain of only 1.9%, with a similar figure excluding automobiles. This compares to the 4%-8% gains in each year from 2003-2007. Real, or inflation-adjusted, retail sales should post little change. Key Story Lines for the Season

Nominal personal consumption expenditures (PCE) are expected to rise 2.9%, while real PCE and real PCE excluding autos should both rise 0.9%. All our 2009 forecasts are in line with prior "recession" readings, though we continue to assume that the expansion began in July. The consumer is arguably in a worse position this year than last year, with unemployment at its highest since 1983, compensation growing at one of the lowest rates in history, and wealth still slowly recovering from the huge hit over the last two years, and debt-service continuing to take a large relative percentage of income. The extremely weak comparison of last year should limit the downside risk for this year. Stores will push discounts early and aggressively to try to shore up sales early in the season given "thin pockets." As such, we would not be surprised to hear news of stronger-than-expected November sales, but would expect sales to drop back in December. Aggressive discounting may imply downside risk for various core inflation measures, but should provide support for "real" spending. There is some talk that lean inventory levels may help margins, however. Industry researcher Forrester (FORR) expects online retail sales to approach $45 billion during November and December, which represents an 8% gain over the year. Holiday Sales Forecasts

The various retail holiday sales forecasts that the markets tend to monitor show improvement relative to last year, but weakness overall. The International Council of Shopping Centers (ICSC) expects growth of 1%-2% for the traditional holiday season (November and December) from chain stores. This compares to the hefty drop of -5.3% in 2008, 1.7% gain in 2007, 3.9% in 2006, and 5.3% in 2005. The National Retail Federation (NRF) expects total holiday retail sales to decline 1.0%. This would be significantly below the 10-year average of 3.4% for holiday season growth, but would be less dramatic than the 3.4% drop last year and the 3.0% drop expected for annual retail sales for 2009 overall. Recent Sales Trends

Industry research and consulting firm Retail Forward expects holiday sales to be flat relative to last year. Outside of the -4.5% plunge last year for their measure, this would mark the worst holiday sales figure in 42 years. Recent retail sales reports have been whipsawed by the auto sector. Focusing instead on ex-autos, however, shows a modest positive trajectory for sales through most of this year, though with nominal gains that largely just track price gains. If we look at a six-month moving average of "core" retail sales— which strips out autos, gasoline, and building materials—it looks like year-over-year sales declines have reached bottom, though we are still seeing negative year-over-year figures. Benefitting from an Easy Comparison

So far in 2009, real consumption was roughly flat through the first half of the year, and likely again in the fourth quarter, with nearly all of the year's sales gain in the third quarter—thanks to the Cash for Clunkers program that "grouped" the 2009 spending gain over the July-August period. Overall, this year's holiday season will beat last year's disastrous performance, which was the worst on record, and will benefit from an easy comparison. Yet, the sales trajectory remains weak on an historic basis as we enter the November-December period, and the year-over-year sales figures for this year will look similar to prior recession readings despite the likely start of a new expansion at midyear. Overall, headwinds for the consumer remain considerable, and any holiday cheer for retailers will be modest at best.

MacDonald is director of investment research and analysis for Action Economics.

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