Since consumer spending represents about two-thirds of U.S. economic growth, a strong consumer generally bodes well for the economy and for the retail industry, in particular. According to the National Retail Federation, over 1 million retail establishments operate across the U.S., and retail sales have increased almost 4% annually since 2010. With the all-important holiday shopping season underway, consumers appear poised to spend to the end for a strong retail finish, despite headwinds that appear to be picking up.
Consumers Power U.S. Growth
Over the past couple of quarters, the consumer has been the engine for U.S. economic growth. Consumption grew 4.6% in the second quarter and slowed to a still-healthy pace of 2.9% in the third quarter, according to initial readings. In general, retailers have benefited: Year-over-year retail sales increased 4.1% through the end of September.
Robust consumer spending has been driven by numerous factors. The labor market has been solid, with the unemployment rate reaching its lowest levels since December 1969. Personal income continues to rise, increasing 0.4% in August following a 0.1% increase in July, as reported by the U.S. Bureau of Economic Analysis. And the U.S. Bureau of Labor Statistics reports that average hourly earnings continue to outpace inflation over the past year. Interest rates, along with associated credit card and mortgage rates, have fallen this year, reducing the cost of debt. Further, U.S. equities have rallied over 20% this year and have hit all-time highs, further boosting consumer confidence and spending.
Winter Storm Brewing?
Expectations remain positive for consumers, as a strong job picture, increasing personal income, low interest rates and a rising stock market should persist. However, some concerns could hamper consumer spending and impact the retail holiday shopping season. Global growth prospects, trade disputes, political uncertainty and mixed economic data all lend an air of uncertainty.
In general, weaker global economic growth — and by association, demand — is starting to make an impact domestically in survey data, particularly around manufacturing as orders appear to be slowing. U.S. plans for a tariff increase on Chinese imports, mainly on consumer goods, are expected to take effect in December; if the full cost of tariffs is passed on to the end consumer, as is usually the case, prices will climb higher and potentially give consumers pause. Additionally, the wealthy may rein in spending if sentiments lean toward a change in the White House in 2020 and a possible end to currently favorable tax laws.
The stock market was initially expected to generate low single-digit earnings growth for the year, but has surprised with strong year-to-date performance that continues to inspire confidence. However, that could change if the economy starts to show cracks and credit gets tighter or consumer spending is impacted.
Lastly, data may suggest consumers are over-leveraged coming into the holiday season, but delving deeper into the numbers reveals that it may be quite manageable relative to household income levels. On the surface, consumer debt has reached an all-time high, but it is estimated that two-thirds of consumer debt is mortgage related, which tends to be low interest and long term. As such, household debt should not be a threat to consumer spending at the busiest time of the year for retail.
Resilient Consumer Makes For Brilliant Season
Concerns about the economic environment may linger, but consumers should remain resilient through year-end, driving spending and retail sales. However, not all retail sectors will benefit equally as certain trends may continue. For instance, in the U.S. Census Bureau’s advance estimates of U.S. retail and food services sales report for September 2019, strong 12-month readings were seen in non-store retailers, food services and drinking places, and motor vehicle and parts dealers. Relative weakness was seen in electronics and appliance stores, as well as gas stations. General merchandise stores also appeared weak, particularly department stores, which posted a 6.1% decline over the 12-month reading.
With all eyes on the retail sector at year-end, investors will be monitoring trends for unexpected shifts and economic news for any sense of changing consumer sentiments, especially those that could carry into the next year. Even as more economic headwinds pick up, the current strong foundation for consumers should at least let them spend to the end.